Implications of soaring crude oil prices

Implications of soaring crude oil prices
Oil market; Resources Quarterly; Regional migration

What happened? Global oil prices posted a fifth straight weekly gain. Brent crude rose by 3.6 per cent to US$76.18 a barrel and the US Nymex added 3.4 per cent to US$74.05 a barrel. Of importance to Australia, the Singapore gasoline price rose by 5 per cent in Australian dollar terms to the highest level since October 2018.

Other reports of note: The Resources and Energy Quarterly was released. The Regional Australia Institute -Commonwealth Bank Regional Movers Index was issued. The Intergenerational Report was released.

Implications: The energy sector of the sharemarket is up 32 per cent on October 2020 lows. The rising cost of petrol may constrain consumer spending in coming weeks, impacting retailers.

Movements in oil prices affect prospects for energy producers and can affect consumer spending, and in turn, prospects for retailers.

What does it all mean?

• Global oil prices are rising – in fact prices are at 2½-year highs. On the demand side, investors are getting more optimistic about prospects for the global economy with the rollout of Covid-19 vaccinations across developed economies. That means more people travelling again. At the same time, on the supply side of the equation, OPEC+ producers are constraining oil production. This Thursday’s OPEC+ meeting is expected to continue with the policy of restraint on production. The energy sector on the Australian sharemarket has lifted by 32 per cent since the lows in October last year.

• While share prices of energy producers have lifted with the oil price (and other prices like those for LNG and thermal coal) we always need to be mindful of the effect of higher energy prices for business and household consumers. Certainly for families, filling up the car with petrol is one of the biggest weekly purchases.

• Every six years the Bureau of Statistics (ABS) releases the Household Expenditure Survey. The last report covered 2015/16 and the next report is due to cover the 2021/22 year. The attached table from the ABS shows the most important items in household weekly budgets at the time of the 2015/16 survey. Filling up the car with petrol is one of the single biggest weekly purchases.

• So with unleaded petrol selling for around $1.75 a litre across many areas of Sydney and Melbourne, investors need to be mindful of the higher cost of petrol on household budgets, and therefore the impact on discretionary spending. The lift in petrol prices of 50 cents a litre from recent lows can cost the average motorist around $30 more when filling up the car with petrol. If petrol prices are sustained at higher prices, people may cut back on some aspects of discretionary or non-essential spending.

• It now costs around $100 to fill up a 70-litre car with unleaded petrol, around $16 more than at the start of 2021.

What do you need to know?

Weekly oil market update

• Last week the key Singapore gasoline price rose by US$4.58 or 5.8 per cent to US$85.90 a barrel – the highest level seen since October 22, 2018. In Aussie dollar terms, the Singapore gasoline price rose by $5.24 or 5 per cent to $110.48 a barrel or 69.49 cents a litre.

• Last week the national average price of unleaded petrol rose by 2.8 cents a litre to 142.4 cents per litre (c/l), according to the Australian Institute of Petroleum. The national average wholesale (TGP) petrol price was up by 2.1 cents last week to 131.8 cents per litre and stands at 134.40 cents a litre today.

• MotorMouth records the following average retail prices for unleaded fuel in capital cities today: Sydney 156.7c/l; Melbourne 151.0c/l; Brisbane 137.2c/l; Adelaide 154.6c/l; Perth 133.3c/l; Hobart 147.9c/l; Darwin 140.7c/l and Canberra 150.2c/l.

Published  by Craig James, Chief Economist, CommSec