Australian shares fell for the fourth consecutive session as oil prices surged above $108 per barrel, driven by escalating US-Iran tensions, with the S&P/ASX 200 closing down 66.3 points (0.75%) at 8,753.1 points.

The sharemarket decline followed another sharp drop the previous day, erasing roughly $32 billion in market value and marking the worst single session since June. The main force behind the sell-off was a steep rise in global oil prices, with Brent crude climbing more than 7% overnight to surpass $108 per barrel, while US West Texas Intermediate crude broke above $103 per barrel.

Those higher energy costs fed directly into global bond markets, pushing yields sharply higher as investors priced in renewed inflation risks. The yield on Australia's three-year government bond rose as much as 18 basis points to 5.03%, while the 10-year yield gained 13 basis points to reach 5.38%.

Market analysts noted that investors are increasingly pricing in interest rate hikes from major central banks, including the European Central Bank, the US Federal Reserve, the Bank of Japan, and the Reserve Bank of Australia. The possibility of further tightening has weighed heavily on equity markets globally, with the Nikkei, Hang Seng, and KOSPI all closing lower.

Reserve Bank of Australia Deputy Governor Andrew Hauser said the central bank will debate further interest rate increases at its upcoming September meeting, citing persistent inflation risks. Assistant Governor Sarah Hunter separately warned that the bank has limited tolerance for stronger price pressures.

Domestic data also pressured equities this week. Business sentiment fell to a three-month low in August, and consumer sentiment sank further in September, raising concerns about household and business spending amid elevated interest rates and rising energy costs.

Energy and resource stocks provided some relief, with Woodside Energy and Santos climbing along with major miners BHP Group and Rio Tinto. By contrast, banking and healthcare stocks bore the heaviest losses, with all four major banks declining and CSL falling after cutting its fiscal 2026 guidance.

Fuel prices across Australia are expected to increase by 20 to 30 cents per liter over the coming weeks, following the sharp rise in global oil prices. Diesel prices, already exceeding $2.50 per liter, could climb further by 10 to 30 cents per liter in the near term, while unleaded petrol prices in major eastern cities, currently around $2.10 per liter, may rise to approximately $2.30 per liter.

The Australian government introduced a slightly relaxed gas reservation plan, requiring exporters to reserve up to 20% of production for the domestic market. Energy Minister Chris Bowen stated the policy aims to ensure affordable gas supplies and maintain a modest surplus in the east coast market.

Oil industry leaders are preparing for a prolonged conflict between the United States and Iran, with expectations that hostilities could extend well beyond the upcoming midterm elections and into the following year. The ongoing hostilities in the Persian Gulf have pushed Brent crude prices above $100 per barrel, though physical delivery costs are significantly higher due to increased tanker rates, insurance premiums, and supply chain disruptions.

At the Asia Pacific Petroleum Conference, attendees expressed concern over the tightening physical oil market, with freight rates for tankers traveling from the Persian Gulf to North Asia rising from $6 per barrel to $30 per barrel. Insurance costs have also surged from $0.05 per barrel to $2.50 per barrel, forcing Middle Eastern oil producers to offer deeper discounts to secure buyers willing to navigate the dangerous waters.

The situation has created severe strain on refined fuel supplies, with global refiners operating at elevated levels but still unable to compensate for lost production from the Middle East and Russia. Vitol's chief executive Russell Hardy noted that current refining capacity remains insufficient to meet demand, leading to continued draws from global oil reserves.

Russian ESPO crude has emerged as a critical alternative, commanding a premium of approximately $20 per barrel above Brent prices as Chinese refiners exhaust other options. The US naval blockade on Iranian ports and restricted access to Venezuelan crude have eliminated two major supply channels, further tightening market conditions.

Industry executives at the conference emphasized that the initial assumption of a brief conflict lasting one to four weeks has proven incorrect, as Iran's decision to close the Strait of Hormuz has complicated efforts to achieve a swift resolution. The absence of any public indication from President Trump regarding negotiations suggests the conflict may persist longer than initially anticipated.

Across Asia, Japan's Nikkei 225 slipped 0.19%, while New Zealand's NZX 50 edged up 0.19%. The Australian dollar continued to strengthen, reaching four-month highs of 72.33 US cents.

The index now sits well below the record high of 9,178.6 points it reached in late August, as oil price shocks, bond market volatility, and weakening domestic sentiment have taken hold. With Middle East tensions showing no signs of easing and global bond yields remaining elevated, investors are likely to stay focused on further oil price movements and any additional signals from the Reserve Bank ahead of its September policy meeting.

Original Sources/Tags: perthnow.com.au, abc.net.au, abc.net.au, schwab.com, abc.net.au, ibtimes.com.au, theguardian.com, oilprice.com, (nasdaq), (australian), (iran), (european)

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