Market Morsel: Burning diesel.

Market Morsel

I drove from Canberra to Melbourne last week, and it hurt my pockets each time I filled up. Diesel has been incredibly expensive in recent years, and it is one of the key inputs into agriculture (and the post-gate supply chain).

The cost of crude oil drives the price of diesel. We all know that, but we can see it clearly in the first chart below, which shows the price correlation between both.

In the past month, we had a conflict in Israel. This was a cause for concern as there was a risk of a widening conflict, which would result in disruptions to supply chains.

If we look at the second chart we can see the relationship between crude and diesel. Australian diesel pricing remains at very high levels but has been showing some downward movement in line with overseas markets.

The biggest factor in the medium to longer term for diesel at present is demand destruction. The price of oil and diesel has been high, and that is leading to consumers reducing their spending on both fuel itself and consumer goods, which use large volumes of fuel in their production and distribution.

Economically, the world is in a tough place, with rising costs of goods – and many people are having to cut their cloth accordingly. This could have an impact on fuel pricing, but remember, it can also have a major impact on agricultural pricing.