Petrol price war keeps pump prices low

From

Weekly petrol; PMI

  • The national average terminal gate or wholesale price of petrol currently stands at a 26-month high of 124.2 cents a litre.
  • Fortunately for motorists, increased competition has seen oil companies holding back on passing on the added increase over the holiday period. In fact pump prices have actually fallen over the past week due to a breakdown in the discounting cycle.
  • The Performance of Manufacturing index eased from 47.6 to 46.3 in December – a 1 year low. Any reading above 50 means the manufacturing sector is expanding. Key sub-indexes were mostly weak with new orders, production and exports still contracting.

What does it all mean?

  • Usually at this time of the year there is a tendency to blame the oil companies for a hike in petrol prices however this time round it certainly isn’t the case and motorists are the clear winners. So far prices at the petrol pump have nowhere near matched the lift in the wholesale (terminal gate prices). In fact despite the global oil price tracking higher and the wholesale petrol prices at 26-month highs, the pump price seems to have fallen in the past week and it is largely due to a breakdown in the discounting cycle.
  • Over the past week, the breakdown of the discounting cycle has resulted in retailers selling fuel in some states at or near cost. The wholesale (terminal gate) price has held at around $1.24 a litre, while capital cities like Sydney, Melbourne, Brisbane and Adelaide had a fuel price of around $1.24-$1.26 a litre. Interestingly the breakdown in the discounting cycle comes at a time when wholesale prices are rising – clearly an unsustainable scenario in the longer term and motorists should enjoy it while they can.
  • The renewed optimism in the global economy recovery has resulted in a sharp rise in the Singapore unleaded price in recent times. However the strength of the Australian dollar has also played a significant part in curbing some of the price impact from the strength in the global oil price. In fact had the Australian dollar remained held at the 84 cents against the US dollar that it was trading at six months ago, motorists would be paying an addition 25- 30 cents a litre for fuel.
  • The sustained slide in the manufacturing gauge clearly highlights the lacklustre activity levels in the domestic economy. The manufacturing sector has now contracted for four consecutive months and is holding at one year lows. In fact the key sub indices of production, new orders and exports personify just how tough times are for the sector – with all three sub indices still showing a contraction. And given the forward looking aspect of these indicators it is unlikely that the manufacturing sector will record any significant improvement anytime soon.
  • The strength of the Australian dollar has had a profound impact on the manufacturing sector, making exports less competitive and keeping selling prices depressed. There is a lot of data out over the next couple of weeks however given the sustained contraction in the manufacturing sector and weakness in other indicators such as housing activity and consumer spending, the Reserve Bank would be hard pressed to justify a near term rate hike, especially given the tame inflation environment.

What do the figures show?

Petrol prices:

  • The national average wholesale (terminal gate) price hit a 26-month low high of 124.2 cents a litre on December 31st. And is currently holding at those levels – up a further 0.6 cents over the week. Just over two months ago (October 1) the terminal gate price stood at an 11-month low of 111.6c/l.
  • Last week, the key Singapore unleaded petrol price fell by US$1.63 (1.6 per cent) to US$103.17 a barrel. And in Australian dollar terms the Singapore gasoline price fell by $1.39 (1.3 per cent) over the week to $103.01 a barrel.
  • The Performance of Manufacturing index fell from 47.6 to 46.3 in December, marking the fourth straight month that the PMI has been below 50, indicating that the manufacturing sector is contracting.
  • Key activity components of the PMI were mostly weaker in December. New Orders recorded a modest improvement (despite still contracting), while production and employment contracted at a faster rate.
  • The production sub index fell 2.4 points to 46.6; new orders rose by 1.0 point to 44.1; the employment index eased 1.8 points to 44.1; exports rose by 2.2 points to 48.6; the index of selling prices rose modestly to 48.2 while input prices and wages also rose.
  • In seasonally adjusted terms nine of the 12 sectors recorded a decline in activity in December.

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. National average retail prices are calculated as the weighted average of each State/Territory’s metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions.
  • The monthly Performance of Manufacturing Index is the Australian equivalent of the US ISM manufacturing gauge. The PMI is one of the timeliest economic indicators released in Australia. The PMI is useful not just in showing how the manufacturing sector is performing but in providing some sense about where it is heading. The key ‘forward looking’ components are orders and employment.

What are the implications for interest rates and investors?

  • The breakdown of the discounting cycle is great news for motorists, boosting spending power as well as consumer sentiment levels. Margin pressure may have a more detrimental impact on independent petrol station operators.

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