Oil price hits 2-year high
Private sector credit; Weekly oil market; Inflation gauge; China data

What happened? Last week global crude oil prices rose by over 4 per cent to the highest levels in more than two years.

Implications: Rising oil prices will keep the global focus on inflation and, in turn, investors will question what this means for interest rate settings.

Other economic data of note: The monthly inflation gauge fell 0.2 per cent in May but was up 3.3 per cent on the year – the highest rate in a decade. Private sector credit rose by 0.2 per cent in April to be up 1.3 per cent on the year. The Chinese manufacturing purchasing manager index (PMI) eased from 51.1 to 51.0 in May with the services PMI up from 54.9 to 55.2.

Movements in the energy prices can affect consumer spending, and in turn, prospects for retailers. The inflation gauge estimates month-to-month price movements for a wide-ranging basket of goods and services. Private sector credit figures have implications for finance providers, retailers, and companies dependent on business spending. The Chinese data is important for exporters, especially rural producers, consumer goods, mining and energy companies

What does it all mean?

• Global oil prices are trading at the highest prices recorded in two years. In fact, the Singapore unleaded price is trading near levels seen in September/October 2019. While Covid-19 cases numbers are climbing in developing nations, in richer nations, the focus is on the rising number of vaccinations being completed. So investors remain optimistic that global oil demand will continue to lift as economies re-open with the summer ‘driving season’ kicking off in the US last weekend. At the same time, OPEC+ nations are doing a good job in restraining oil production, and thus supporting prices. OPEC and its allies are scheduled to meet this week with a focus on crude supply. Decisions reached may be important for oil producers and fuel retailers.

• There are a number of implications from high and rising petrol prices. Higher oil prices boosts inflation, causing investors to focus on the scope for higher interest rates. At the same time, higher oil prices lift business costs as well as serving to restrain consumer spending power. In short, oil market developments are a primary focus area for investors.

• With crude oil prices driving up annual inflation rates, it is timely that the latest monthly inflation gauge has been released. And the interesting point is that both headline and underlying measures fell in the latest month after firm gains over both February and March. But even with the decline in prices in May, the annual headline rate has lifted to a decade high of 3.3 per cent. Now while most investors are aware that this annual rate is not sustainable (off a low base), the concern is that it could still serve to lift inflation expectations. And therefore it is a trend worth watching.

• Apart from housing, there is still a reluctance by Aussies to borrow. But with new lending being matched by loan repayments, there is still healthy activity levels for financiers. Inflation fears are also boosting longer-term rates and serving to support finance sector share prices.

What do you need to know?

Weekly Oil Market

• Over the week, Brent crude prices rose by 4.8 per cent to a 2-year high of US$69.63 a barrel. And the US Nymex price lifted 4.3 per cent to US$66.32 a barrel. The Nymex had hit a 31-month high on May 27.

• Last week the key Singapore gasoline price rose by US$4.71 or 6.5 per cent to US$77.50 a barrel. In Australian dollar terms, the Singapore gasoline price rose by $6.45 or 6.9 per cent to $100.30 a barrel or 63.08 cents a litre. The last time Singapore gasoline was above A$100 a barrel was late February 2020.

• Last week the national wholesale price of unleaded petrol averaged 126.5 cents per litre, broadly unchanged over the week according to the Australian Institute of Petroleum. Today the Australian average price stands at 126.6 cents a litre.

• MotorMouth records the following average retail prices for unleaded fuel in capital cities today: Sydney 152.8c/l; Melbourne 139.2c/l; Brisbane 134.5c/l; Adelaide 143.4/l; Perth 128.5c/l; Hobart 145.0c/l; Darwin 139.8c/l; and Canberra 140.3c/l.

Private sector credit

• Private sector credit (effectively outstanding loans) rose by 0.2 per cent in April after rising 0.4 per cent in March. Annual growth lifted from 1.0 per cent on the year (the weakest annual growth rate in 11 years) to 1.3 per cent.

• In April, owner-occupier housing credit rose 0.6 per cent (6.2 per cent annual); investor housing rose 0.4 per cent (1.1 per cent); other personal credit was flat (down 7.8 percent); and business credit fell 0.3 per cent (down 3.0 per cent).

Chinese purchasing manager indexes (PMI)

• China’s ‘official’ manufacturing PMI eased from 51.1 in April to 51.0 in May (consensus: 51.1). The non-manufacturing or services PMI rose from 54.9 to 55.2. Readings above 50 denote an expansion in activity.

Melbourne Institute inflation gauge

• The headline inflation measure fell by 0.2 per cent in May but was still up 3.3 per cent on a year ago – the strongest annual growth rate in a decade. The trimmed mean gauge – the Reserve Bank’s preferred measure – fell by 0.1 per cent – the first decline since October 2020. The annual rate rose from 1.6 per cent to 1.8 per cent.

Published by Craig James, Chief Economist, CommSec