Weekly Petrol Prices

* Oil price war: A production agreement between OPEC+ nations (largely OPEC and Russia) has ended. Global oil prices fell 10 per cent on Friday and fell another 26 per cent today.

* Petrol prices: Due to a holiday in Canberra, the Australian Institute of Petroleum will publish the regular weekly national average petrol price data on Tuesday.

Movements in the petrol price can affect consumer spending, and in turn, prospects for retailers.

What does it all mean?

• The oil production agreement made between the OPEC group and other exporters like Russia (OPEC+ group) has effectively fallen apart. According to the Russian Energy minister “From April 1 neither OPEC nor non-OPEC have restrictions.” The current agreement ends at the end of March.

• From here, effectively anything may happen. Saudi Arabia and Russia may open the floodgates, lifting oil output in an attempt to lift market share. But it is also possible that cooler heads will prevail and oil producers may return to the negotiating table. Oil prices have already been under downward pressure. The COVID-19 coronavirus has led to a reduction of air travel and therefore reduced demand for oil products like gasoline and aviation fuel. If supply of oil were to lift as a result of the breakdown of OPEC+ then this would be effectively a ‘double whammy’ on the oil markets.

• On Friday, Brent crude fell by US$4.72 or 9.4 per cent to US$45.27 a barrel. The US Nymex price fell by US$4.62 or 10.1 per cent to US$41.28 a barrel. This morning Brent has fallen to below US$34 a barrel with Nymex crude near US$31.00 a barrel.

• Lower oil prices represents good news for Aussie motorists. The ready-reckoner is that every US$1 a barrel fall in the oil price leads to a 1 cent fall at the petrol bowser. Provided the Aussie dollar is reasonably stable, motorists may be able to look forward to filling up for near $1 a litre.

• The last time that the Nymex oil price was trading around current levels was four years ago in late February 2016. And at that time Adelaide prices fell as low as 97.5 cents a litre with the national price at 106.5 cents a litre. The factor that could work against motorists is the Aussie dollar. Today the Aussie is near US65 cents whereas it was trading near US71-72 cents four years ago.

• Nymex oil traded as low as US$26.05 a barrel in February 2016. The previous low was US$25.42 a barrel in May 2003. The oil price hasn’t been able to consistently hold below US$40 a barrel since 2004.
What do the figures show?

Petrol prices

• MotorMouth records the following average retail prices for unleaded fuel in capital cities today: Sydney 125.0c; Melbourne 123.5c; Brisbane 122.8c; Adelaide 118.4c; Perth 123.9c; Canberra 143.6c; Darwin 135.9c; Hobart 153.7c.

• Before the news of the OPEC+ breakdown, the key Singapore gasoline price closed the week at US$56.40 a barrel, down US40 cents or 0.7 per cent on the week. In Australian dollar terms, the Singapore gasoline price fell by $1.63 or 1.9 per cent to a 13-month low of $85.43 a barrel or 53.73 cents a litre. In the past five months the Singapore gasoline price has fallen around 21 cents a litre in Australian dollar terms.
What is the importance of the economic data?

• Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum (AIP). National average retail prices are calculated as the weighted average of each State/Territory metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions. AIP data for retail petrol prices is based on available market data supplied by MotorMouth.
What are the implications for interest rates and investors?

• Filling up the car with petrol is the single biggest weekly purchase for most households. The fall in the oil price works like a de-facto interest rate cut. But arguably the lower petrol price could prove more stimulatory. Many home buyers have responded to recent rate cuts by electing to pay down debt at a faster rate rather than use savings to engage in retail therapy.

• A $50 fall in the monthly fuel bill equates to a quarter of a percent fall for a $350,000 mortgage. Over the last six weeks the monthly fuel bill has already fallen by $30.

• For energy producers, arguably the breakdown of the OPEC+ production agreement is happening at the worst possible time. Demand for oil was already plummeting in the wake of COVID-19. Now there is the prospect of increased oil output from key producers. The S&P/ASX 200 energy sector has fallen around 19 per cent today. The broader ASX 200 index has fallen by as much as 400 points or 6.4 per cent.

• The lower oil price could induce a deflationary shock on global economies, on top of the demand destruction from COVID-19. Falling prices at the already low level of interest rates would make it challenging for central banks. In this environment the onus falls on governments to inject stimulus.

Published by Craig James, Chief Economist, CommSec