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Morgan Stanley says Australia is one of the countries most exposed to the fallout of an extended conflict in the Middle East, pointing to an outsize reliance on imported oil and warning of a hit to earnings.

In a note to clients, equities strategists at the Wall Street investment banking giant said Australia sat “at the front of the queue in terms of impact from the global energy shock triggered by the Iran conflict”.

“[It] may be one of the first economies to face a meaningful disruption linked to diesel. In the absence of off-ramps, we expect consumption shifts, activity misses and volatility in sector earnings,” strategist Chris Nicol said.

Oil prices have soared about 50 per cent since the US and Israel first attacked Iran three weeks ago, with Brent crude trading about $US105 a barrel on Friday. The conflict, which has shown no signs of de-escalating, has sent global markets tumbling, with the S&P/ASX 200 down about 8 per cent since it closed out last month on 9198.6 points.

Of most immediate concern is the closure of the Strait of Hormuz, which has pushed major sources of diesel and petroleum, such as China, to cancel exports. Truck drivers are already warning that diesel prices rising above $3 a litre have pushed them to the brink, while farmers say a fertiliser crunch would hit consumers on the supermarket shelves.

Ampol on Friday told investors that it would delay a planned two-month shutdown of its Brisbane refinery because of the crisis, and was working to source alternative fuels after China’s export restrictions.

The disruption to supply will be particularly acute for Australia, given the reliance on imported diesel – 90 per cent is shipped into the country – according to Tom Allen, the head of energy and utilities research at UBS.

“Given Australia’s dependence on imported refined product from Asia, whose refining sector is materially dependent on medium to heavy-sour grade oil stranded inside the Persian Gulf, pressure on Australia’s supply chain for refined product will continue to build,” Allen said.

Hit to industries

Morgan Stanley’s Nicol said fuel comprised about 14 per cent of the Australian transport sector’s input costs, along with about 10 per cent for the mining and agricultural sectors. Diesel prices, he said, have jumped 58 per cent since the war started.

“A 10 per cent reduction in refined fuel usage could generate a $5 billion to $15 billion hit across these most-affected industries,” he said, adding that S&P/ASX 200 could drop by as much as 34 per cent in a bear case scenario, in the event of a full-blown energy supply shock, to 6875 by the year’s end.

The country’s major resources companies have been among the hardest hit by the conflict, down more than 20 per cent since the war began. BHP and Rio Tinto have fallen roughly 20 per cent and 13 per cent, respectively, while gold miners such as Newmont have plunged more than 20 per cent.

On the other hand, energy stocks are up 16 per cent, buoyed by oil and gas giants Woodside Energy and Santos, which benefited from rising prices.

Wall Street edged down overnight on Thursday despite Israeli Prime Minister Benjamin Netanyahu’s claim that Iran was no longer able to enrich uranium or manufacture ballistic missiles and the war could soon end.

That followed the biggest day of strikes on energy assets since the war started, including extensive damage to the world’s biggest liquefied natural gas plant in Qatar that will take years to repair. Brent has gained almost 50 per cent this month, according to Bloomberg.

“The market, as we are seeing, is mirroring the terrifying headlines and that sees investors follow with more selling, as emotion and fear wrestle for the steering wheel and take over,” said Bell Potter institutional sales trader Richard Coppleson. “And that adds to the extreme volatility we are seeing.”