Higher oil prices, but energy sector at 2-month low

Job ads; Oil market update; Inflation gauge

What happened? Crude oil prices rose by 2.5-3 per cent last week. And the key Singapore regional gasoline price is now not far off the levels seen in October 2018. The Australian terminal gate (wholesale) unleaded price is today at the highest levels since late September 2019. But on the sharemarket, energy sector prices have been falling, hitting a 2-month low on Friday.

Economic data: ANZ job advertisements fell by 0.5 per cent in July from 12½-year highs. The Melbourne Institute inflation gauge showed the headline and trimmed mean measures both up 0.5 per cent in July.

Implications: Forward-looking investors remain concerned about the surge in the global number of delta variant cases. So while oil prices have lifted on short-term tightness of supplies, the outlook for energy demand and oil prices is more uncertain.

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

What does it mean?

• Covid-19 continues to be the major focal point of attention across the globe – both in terms of vaccination rates and the rising case numbers of the delta variant. On financial markets, one day there is optimism about rising vaccination rates and the hope that some normalcy can return. Other days, the lift in cases of the more contagious delta variant has led to reintroduction of lockdowns, border closures and new restrictions on mobility.

• The expectation is that the battle against the virus will eventually be won – but the timing of the victory is clearly open for debate. And that battle is clearly evident on financial markets. The price of Brent cruse rose by 1.6 per cent in July – the fourth monthly gain. But the Australian S&P/ASX 200 Energy sector fell by 2.5 per cent in July and is now over 8 per cent lower than the high set in early June. Shares in Exxon Mobil in the US also slumped 8.7 per cent in July.

• Don’t expect the tug-o-war between oil prices and energy sector share prices to be over soon. But what the current situation highlights is the need to monitor the daily news on Covid-19. Clearly the energy sector is just one of the sectors of interest – travel, leisure, technology, retailing, and services more broadly, are being buffeted on a daily basis by the news flow.

• Overall, there does seem to be a healthy degree of investor optimism. In Australia, the ASX 200 rose by 1.1 per cent in July – the 10th straight monthly gain. That is the longest winning streak since 2007. And the ASX 200 index hit record highs today, breaching 7,500 points for the first time ever.

• Investors are still looking past lockdowns and Covid-19, receiving inspiration from US stocks hitting record highs. Further, the Reserve Bank is expected to soften/change its tone tomorrow, not reigning in bond-buying for now due to lockdowns.

• CommSec has lifted forecasts for the sharemarket and now we expect the ASX 200 to rise to a range of 7,600-7,800 points by the end of calendar 2022. Governments and central banks will maintain stimulatory settings for longer. But economic recoveries across the globe will continue to involve greater spending on infrastructure, supporting demand and prices for raw materials.

What do you need to know?

Job advertisements – July

• According to ANZ, job advertisements fell from 12½-year highs in July, down 0.5 per cent to 206,819 available positions. Ads had lifted for a record 13 successive months.

Melbourne Institute inflation gauge – July

• The headline inflation measure rose by 0.5 per cent in July but the annual rate eased from 3.0 per cent to 2.6 per cent. The trimmed mean gauge – the Reserve Bank’s preferred measure – lifted by 0.5 per cent with the annual rate up from 1.8 per cent to 1.9 per cent.

Weekly Oil Market Update

• On Friday the Brent crude price rose by US28 cents or 0.4 per cent to US$76.33 a barrel. And the US Nymex price rose by US33 cents or 0.4 per cent to US$73.95 a barrel. Over the week Brent rose by 3.0 per cent and Nymex rose by 2.6 per cent.

• The key Singapore gasoline price rose by US$1.80 or 2.1 per cent to US$86.50 a barrel last week. The key regional gasoline price is just below the 3-year high of US$89.30 set on July 6 (highest since October 12, 2018). And in Australian dollar terms, the Singapore gasoline price lifted by $2.19 or 1.9 per cent to $117.19 a barrel or 73.71 cents a litre – a near 2-year high.

• Last week the national average price of unleaded petrol rose by 3.3 cents a litre to 151.1 cents per litre (c/l), according to the Australian Institute of Petroleum. The national average wholesale (TGP) petrol price was down by 0.2 cents last week to 137.4 cents per litre but stands at 139.1 cents a litre today – highest since September 27, 2019.

• MotorMouth records the following average retail prices for unleaded fuel in capital cities today: Sydney 147.0c/l; Melbourne 166.0c/l; Brisbane 142.7c/l; Adelaide 140.6c/l; Perth 139.3c/l; Hobart 153.0c/l; Darwin 149.9c/l and Canberra 151.5c/l.

Published by Craig James, Chief Economist, CommSec