Ampol makes Z Energy bid as Sydney petrol prices soar

Oil market update; Purchasing managers’ indexes

What happened? Crude oil prices have closed lower for seven consecutive trading sessions, posting their biggest week of losses in at least nine months. Last week, the Brent crude price slid US$5.41 a barrel or 7.7 per cent to US$65.18 a barrel. Prices are in the longest losing streak since February 2018. And the US Nymex price dropped US$6.12 a barrel or 8.9 per cent to US$62.32 a barrel, posting its longest run of losses since October 2019.

Earnings update: Aussie petroleum company Ampol announced a sharp increase in earnings in the first half of 2021. Underlying profit jumped 70.8 per cent to $205 million, underlying earnings lifted 53.8 per cent to $340 million and the company said an interim dividend of 52 cents per share will be paid to shareholders. Ampol also confirmed that it had lobbed a $2.5 billion takeover bid to acquire New Zealand fuel retailer Z Energy.

Other economic data: The ‘flash’ or preliminary Australian IHS Markit Manufacturing Purchasing Managers’ index (PMI) fell from 56.9 in July to a 14-month low of 51.7 in August. The Services business activity index dropped from 44.2 to a 15-month low of 43.3 in August. The combined or composite PMI eased from 45.2 to a 15-month low of 43.5 in the month. Readings below 50 indicate a contraction in activity.

Movements in energy prices can affect consumer spending, and in turn, prospects for retailers. Purchasing manager surveys are important in assessing the outlook for interest rates and spending.

What does it mean?

• Global oil prices tumbled last week, declining for seven successive trading sessions to Friday – the longest losing streak for Nymex crude since October 2019. The US Federal Reserve last week signalled its intention to reduce its monetary stimulus later this year, contributing to a strengthening of the US dollar (USD) which hit 9-month highs. A stronger greenback can make US dollar denominated commodities more expensive for foreign purchasers, like Australia.

• The surge in global delta virus cases has clouded the oil demand outlook. While immunisation rates continue to lift worldwide, increased government restrictions and reduced mobility to combat outbreaks across Asia have dampened investor sentiment towards crude.

• In response to the lift in new infection rates, the US and China have both imposed flight-capacity restrictions, weighing on jet fuel demand. And as the US summer holiday ‘driving season’ comes to an end, road traffic congestion in the country remains below pre‑pandemic levels. But Bloomberg is reporting that China’s “zero tolerance” virus strategy may be working with lockdown measures easing and road conditions picking up in recent days as new virus cases fall.

• Reduced fuel demand comes at a time when supply is steadily increasing. US crude production rose to 11.4 million barrels per day in the past week, and US shale drilling firms added oil rigs for the third week in a row, according to oil services company Baker Hughes.

• So can Aussie motorists expect any relief at the bowser? Certainly, the cost of importing refined petroleum has eased in recent weeks, but the weaker Aussie dollar (AUD) is proving to be an impediment to bigger declines. Last week the AUD fell by 3.2 per cent against the greenback, its worst performance in almost a year. The benchmark Singapore gasoline price slid US$8.21 or 6.8 per cent – the most in 17 months – to US$75.70 a barrel last week. And in Aussie dollar terms, the Singapore gasoline price shed $6.28 or 5.6 per cent – the biggest fall in five months – to $106.13 a barrel or 66.75 cents a litre.

• Frustratingly for Sydney’s essential workers, fuel prices have risen to as high as 177.9 cents a litre in some suburbs today, according to real-time fuel app MotorMouth. Retailers continue to defend their margins as the ongoing lockdown reduces demand for petrol. Sydney’s average wholesale (TGP) petrol price stands at 136.6 cents a litre today, well below the city’s average retail unleaded petrol price of 166.5 cents a litre, a mark-up of almost 30 cents a litre. The Sydney daily average price is just 3 cents a litre short of the record high of 169.5 cents a litre recorded on July 11, 2008, according to the Australian Institute of Petroleum.

• Improved refinery earnings saw Aussie petroleum company Ampol today announce a sharp increase in earnings in the first half of 2021. Underlying profit jumped 70.8 per cent to $205 million, underlying earnings lifted 53.8 per cent to $340 million and the company said an interim dividend of 52 cents per share will be paid to shareholders. Ampol also confirmed it had lobbed a $2.5 billion takeover bid to acquire New Zealand fuel retailer Z Energy. That said, Sydney and Melbourne lockdowns have hit fuel volumes in July (down 15 per cent) and August (down 17 per cent) when compared to the prior corresponding period, with the company warning of a weaker second half of 2021. Ampol’s share price has come under pressure today following the announcement.

• Purchasing manager surveys by IHS Markit economists suggest that a sizeable economic contraction is underway in Australia in the September quarter. While the August headline manufacturing index remained above the neutral 50 point line – which separates an expansion from a contraction in activity – manufacturing sector output fell to 44.5 points, contracting for the first time since June 2020. And activity in the much larger services sector tanked in August to 43.3 points, a 15-month low for business activity due to the Delta Covid-19 wave.

• As expected, employment conditions deteriorated across both the factory and services sectors due to prolonged lockdowns and reduced demand, while input price inflation remained elevated and output charges picked up pace in August. Despite the dire near-term economic outlook, IHS Markit economists reported, “The one bright spot had been an improvement in the outlook amongst Australian private sector firms in August, with hopes of an improvement in the COVID-19 situation expected to spark an eventual rebound for the Australian economy.”

• And in an early sign the latest Covid shock is impacting consumer prices and demand, Aussie used car prices fell by 3.9 per cent last week, according to Datium Insights. Supply was down by 1.1 per cent due to lockdowns with clearance rates 3.1 per cent lower. Restrictions saw demand for second hand Toyota Klugers ease with prices down 7.6 per cent, the biggest fall across the top 15 traded used vehicles over the week ended August 23.

What do you need to know?

Weekly oil market update

• Crude oil prices have closed lower for seven consecutive trading sessions, posting their biggest week of losses in at least nine months. Last week, the Brent crude price slid US$5.41 a barrel or 7.7 per cent to US$65.18 a barrel. Prices are in the longest losing streak since February 2018. And the US Nymex price dropped US$6.12 a barrel or 8.9 per cent to US$62.32 a barrel, posting its longest run of losses since October 2019.

• The benchmark Singapore gasoline price slid US$8.21 or 6.8 per cent – the most in 17 months – to US$75.70 a barrel last week. In Aussie dollar terms, the Singapore gasoline price shed $6.28 or 5.6 per cent – the biggest fall in five months – to $106.13 a barrel or 66.75 cents a litre.

• Last week the national average price of unleaded petrol fell by 1.3 cents to 152.1 cents per litre (c/l), according to the Australian Institute of Petroleum.

• The national average wholesale (TGP) petrol price fell by 0.7 cents last week to 137.8 cents per litre and stands at 136.4 cents a litre today.

• MotorMouth records the following average retail prices for unleaded fuel in capital cities today: Sydney 166.5c/l; Melbourne 149.1c/l; Brisbane 154.3c/l; Adelaide 149.7c/l; Perth 139.5c/l; Hobart 155.7c/l; Darwin 151.8c/l and Canberra 152.3c/l.

Purchasing Managers’ indexes (PMIs) – August

• The ‘flash’ or preliminary IHS Markit Manufacturing Purchasing Managers’ index (PMI) fell from 56.9 in July to a 14-month low of 51.7 in August. The Services PMI dropped from 44.2 to a 15-month low of 43.3 in August. The combined or composite PMI eased from 45.2 to a 15-month low of 43.5 in the month. Readings below 50 indicate a contraction in activity.

• According to IHS Markit economists, “Not only were demand and business activity hit, employment conditions also deteriorated, with private sector staffing levels falling for the first time since October 2020. The labour market situation had been made worse on both ends of supply and demand amid the latest COVID-19 disruptions.”

Published by Ryan Felsman, Senior Economist, CommSec