Energy sector lifts as investors weigh up Delta/Vax

Oil market update; ANZ job ads; Monthly inflation gauge

What happened? Last week, the Brent crude price fell by US9 cents or 0.1 per cent to US$72.61 a barrel while Nymex crude rose by US55 cents or 0.8 per cent to US$69.29 a barrel.

Implications: The S&P/ASX Energy sector rose by 2 per cent last week, outpacing the broader ASX 200 index (up by 0.5 per cent). US Nymex crude has lifted 11.5 per cent since hitting recent lows on August 20.

Other data released: Job advertisements (as tracked by ANZ) fell by 2.5 per cent in August. According to the Melbourne Institute the trimmed mean inflation measure fell 0.1 per cent in August. The annual rate lifted from 1.9 per cent to 2.3 per cent – the strongest annual growth rate in 3½ years.

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

What does it mean?

• The global oil market is contending with a range of influences at present. Delta virus cases continue to lift across the globe, causing some investors to worry that governments will again restrict mobility (such as is occurring in parts of Australia), trimming oil demand.

• Worries about the influence of Delta were doing the rounds on Friday. US employment (non-farm payrolls) rose by only 235,000 in August, when economists were looking for job gains of around 750,000. Some analysts worried that this indeed did show the influence of Delta, particularly on the services sector. If the pace of the US economic recovery is at risk, then that would translate to less demand for oil.

• And on that weaker-than-expected US jobs result, CBA Group economists have changed their views on US monetary policy settings: “…the setback in the recovery in the labour market and the jump in serious infections will encourage the Federal Open Market Committee (US central bank) to wait before it announces it will taper its monthly asset purchases. We now expect the FOMC to announce an $US10bn taper of its monthly asset purchases at its 3 November meeting. Our previous expectation was an announcement on 22 September. Implementation of asset purchases is now likely to start in December 2021.”

• At the same time that global Delta cases are lifting, so are vaccination rates. If these jab trends were to continue then that would mean that economies would have greater scope for re-opening. Caution on reducing monetary policy stimulus should further support economic recoveries. So we are at an interesting juncture for the oil markets.

• Over the past week, oil prices were supported by the impact of Hurricane Ida on crude oil production in the Gulf of Mexico (in other words, there are short-term supply disruptions). As of Friday, 1.7 million barrels or 93 per cent of daily crude output was suspended.

• And the other issue of note over the week was the confirmation that OPEC+ oil producers will only gradually increase production quotas by 400,000 barrels per day over the next few months. The US government applauded the move – it has been critical that high oil prices were constraining economic recoveries across the globe – with elevated gasoline prices crimping consumer spending. And the government still contends that prices are too high.

• Overall, crude prices look set to hold near US$70 a barrel – good news for producers but not Aussie motorists and businesses. The regional Singapore gasoline price has lifted 9 per cent in the past fortnight. But one positive for motorists is the higher Australian dollar. In just the past fortnight the Aussie has risen from US71 cents to US74.50 cents. A weaker greenback and firmer commodity prices have lifted the Aussie. And that firmer currency will keep down the local cost of imported oil.

What do you need to know?

Weekly oil market update

• Last week, the Brent crude price fell by US9 cents or 0.1 per cent to US$72.61 a barrel while Nymex crude rose by US55 cents or 0.8 per cent to US$69.29.

• The benchmark Singapore gasoline price rose by US$2.15 or 2.7 per cent to US$82.60 a barrel last week. In Aussie dollar terms, the Singapore gasoline price lifted 26 cents or 0.2 per cent to $111.28 a barrel or 69.98 cents a litre.

• Last week the national average price of unleaded petrol fell by 2.2 cents to 150.6 cents per litre (c/l), according to the Australian Institute of Petroleum.

• The national average wholesale (TGP) petrol price rose by 0.9 cents last week to 136.7 cents per litre. Today the TGP price sits at 137 cents per litre.

• MotorMouth records the following average retail prices for unleaded fuel in capital cities today: Sydney 163.0c/l; Melbourne 148.4c/l; Brisbane 145.2c/l; Adelaide 148.1c/l; Perth 139.3c/l; Hobart 155.6c/l; Darwin 151.8c/l and Canberra 152.1c/l.

Job advertisements – August

• With more than half of Australia’s population currently in lockdown and businesses shut, demand for labour continued to fall in August. According to ANZ, job advertisements fell by 2.5 per cent in August to 195,995 available positions. Prior to this, ads were down 1.3 per cent in July after lifting for a record 13 successive months through to June. Vacancies are still up by 78.9 per cent on a year ago.

• Encouragingly, the cumulative number of vacancies (down 3.7 per cent since June) are down much less than the record falls seen in last year’s national lockdown. Back then the number of advertised jobs plunged by 64 per cent within a three-month period (March-May 2020). So while the near-term outlook for the labour market is negative, with mass job losses and hours worked lost, the data suggests that some businesses are acutely aware that they’ll need additional workers once the NSW, ACT and Victorian economies eventually re-open.

Melbourne Institute inflation gauge – August

• The headline measure of inflation from the Melbourne Institute was flat in August and the annual rate eased from 2.6 per cent to 2.5 per cent. The trimmed mean gauge (which excludes volatile food and energy prices) – the Reserve Bank’s preferred measure – fell by 0.1 per cent but the annual rate lifted from 1.9 per cent to 2.3 per cent – the strongest annual growth rate in 3½ years. But the lift in the annual rate was primarily due to base effects from last year. In our view, policymakers will likely ‘look through’ the latest update which showed annual underlying consumer prices back within the Reserve Bank’s 2-3 per cent target range.

• With the Bureau of Statistics only providing a quarterly update on consumer prices, the best gauge of monthly inflation is the Melbourne Institute measure of prices. While Covid-related supply-side constraints, soaring online demand and labour shortages in some industries have increased costs, the latest shock to the economy from Delta-induced lockdowns has been deflationary.

Published by Craig James, Chief Economist, CommSec