AdviserVoiceglobal oil prices Archives - AdviserVoice https://www.adviservoice.com.au/tag/global-oil-prices/ Financial planner information & financial planner education/CPD - AdviserVoice Mon, 08 Jun 2026 21:25:34 +0000 en-US hourly 1 https://wordpress.org/?v=7.0 The surprise for investors during the Middle East flare-ups https://www.adviservoice.com.au/2014/09/surprise-investors-middle-east-flare-ups/ https://www.adviservoice.com.au/2014/09/surprise-investors-middle-east-flare-ups/#respond Sun, 21 Sep 2014 22:00:17 +0000 https://adviservoice.com.au/?p=32934 Oil prices have responded to political volatility in the Gulf.

Oil prices have responded to political volatility in the Gulf.

In 1973, Egypt and Syria launched a surprise attack on Israel during the Jewish religious festival of Yom Kippur. The swift arrival of arms from the US helped Israel repel the assaults.

Opec nations, upset at US support for Israel, cut oil production and placed a sales embargo on the US and any European country that helped Washington funnel arms to Israel. Oil prices surged nearly 400% over the next 12 months in what became known as the first oil shock of 1973-74.  The result was the stagnation of the 1970s.[1]

In 1978, a revolution began in Iran that resulted in the Shah fleeing into exile the following year, during which time the new regime fermented trouble with the US culminating in the occupation of the US embassy in Tehran. The year 1979 was when Saddam Hussein gained dictatorial control of Iraq and protests gripped Saudi Arabia. Oil prices more than doubled from 1979 to 1980 in what became known as the second oil shock of 1979-80. Inflation in the US was 9% by year end, forcing new Federal Reserve Chairman Paul Volcker to raise the US cash rate from 11% to 19% from 1979 to 1981 to purge it. The economic cost was, at the time, the most severe US recession since the Great Depression.[2]Since the oil shocks of the 1970s, oil prices have spiked just about every time a crisis blazed in the Middle East. Prices jumped when Israel invaded Lebanon in 1982, after Iraq conquered Kuwait in 1990 and during the subsequent Iraq War of 1991 and around the US-led invasion of Iraq in 2003. They climbed whenever violence intensified during the two Palestinian Intifadas or uprisings of 1987 to 1991 and 2000 to 2005. They surged to a record high of about US$147 a barrel in 2008 when tensions surrounding Iran’s nuclear program and unrest in oil-producing Nigeria and Venezuela coincided with strong global growth.

Oil prices have responded to political volatility in the Gulf because 66% of the world’s known oil reserves are located in the Middle East Opec member countries; namely Iran, Iraq, Kuwait, Saudi Arabia, Qatar and the United Arab Emirates.[3] Often, oil prices would jump, almost irrationally on any flare-up around the globe, even if non-oil producers were involved, because they were treated as a bellwether of global instability.

In recent months, Russia, the world’s third-biggest producer of oil, has tussled with the west over Ukraine. The US military re-engaged in Iraq to fight Islamists after they seized about one-third of Iraq, a country that has 12% of Opec’s reserves, having already gained control of about a third of neighbouring and oil-producing (but non-Opec) Syria. Libya, with 4% of Opec’s reserves, descended into deeper chaos for the most part. For the third time in six years, Israel attacked Gaza, which is allied with Qatar, where 2% of Opec’s reserves lie. How much did oil prices jump during this turmoil, a time when global purchasing managers indices pointed to stronger global growth? Well, they fell. To the surprise of many, the US benchmark West Texas Intermediate dropped below US$100 a barrel in August – and fell as low as US$91.66 on September 1, its lowest in seven months – from an average of US$106 in June, while Brent Crude, which is the basis for what Europeans pay for oil, was at a 16-month low in early September when it dropped to US$100.34. Why? Largely due to the shale revolution in the US. A 55% surge in US oil production over the past six years that has boosted US output to about 10% of global production appears to have changed the supply-demand dynamics of global oil markets enough to weaken the sway the Middle East holds over prices as the so-called swing producer, a dynamic that is largely due to Saudi Arabia’s ability to alter production. The drop in oil price – and the resulting absence of any dent to US consumer spending – is one of the reasons why global stock markets withstood the crises of recent months. Indications are that the US shale revolution will help insulate the global economy from political upheavals in the Middle East in coming years.

Oil prices in July and August might well have been lower if the Middle East had been calmer. Not all the recent decline in oil prices is tied to the US shale revolution. Oil prices also slid because Libya in July reopened an oil-exporting port that had been closed by rebels for 12 months. As well, Washington’s decision to bomb the Islamic militants in Iraq reduced the political risks to Iraq’s oil industry. The Islamists in their self-declared caliphate are selling cheap oil from captured wells, as are the Kurds from their autonomous part of Iraq. More longer term, greater fuel efficiency and a switch to renewable energy are reducing demand for oil, so it’s not just shale lowering the price. Events in the Middle East could always spiral out of control enough to boost oil prices, no matter what US shale-related production might be, especially if Iraq’s southern oil fields were captured by Islamists or Saudi Arabia became unstable. (Don’t rule it out.) Ructions elsewhere could ignite oil prices, especially in Ukraine. The growing appetite of the emerging world, especially of China, for Middle East oil could rejig the demand-supply equation more in favour of Opec. Still, the decline in oil prices in July and August shows the US shale revolution is insulation against Middle-East turbulence these days. This gives investors one less worry when they scan the risks ahead.

The last resort

The US shale revolution came about because mining engineers worked out that horizontal drilling and hydraulic fracturing (or “fracking”) allowed them to extract the oil and natural gas that are trapped in layers of sedimentary rock. While there are large shale reserves around the world, only in the US was the extensive pipeline infrastructure, technical know-how, ample water and favourable tax and regulatory regimes in place to enable the new technology to be exploited.

Thanks to fracking, the US arrested years of declining oil production and boosted output enough to become a net exporter of refined oil products for the first time in 60 years[4] – franking is even leading to the end of the ban on crude oil exports in place since 1975 as exceptions are being allowed.[5] Statistics from the US’ Energy Information Administration show that US crude oil production averaged 8.5 million barrels per day in July this year, the highest monthly output in 27 years and about 3.5 million barrels a day more than in 2008. The statistical arm of the US Energy Department expects US crude production to reach 9.3 million barrels a day in 2015, a prediction that, if fulfilled, would represent the highest output since 1972.[6]

All this extra production reduces the US’ reliance on imported oil and often forces Opec and other oil-exporting countries to discount in their search for replacement markets. The surge in US domestic production cut US oil imports to 7.17 million barrels a day of crude in May this year, a 26% decline from six years earlier. The share of US petroleum needs met by net imports dropped to 33% in 2013 from 60% in 2005. The Energy Information Administration “expects the net import share to decline to 22% in 2015, which would be the lowest level since 1970”.[7]

The US motorist is enjoying the benefits of the US shale revolution. Petrol prices fell 8 US cents a gallon (or 3.2 US cents a litre) to US$3.61 in July from June, as global oil prices slid. (Did you notice how cheap petrol has been in Australia lately?) The Energy Information Administration is predicting retail prices to decline to US$3.30 a gallon by December, a prediction that is all the more surprising because demand for crude in the US is at a record high. In April 2014, US demand for petroleum products was 187,000 barrels a day higher than a year earlier thanks to faster economic growth fanning activity.[8]

The ones you can rely on

Wondering why global stocks as well as US equities benefited from these lower US petrol prices? The answer is that US consumers still play the most pivotal role in the world economy.

Investors everywhere prioritise tracking the US economy because the US citizen is what economists refer to as the world’s “consumer of last resort”. If you take the term literally, it means that companies can always export their produce to the US if people elsewhere aren’t spending. While that’s an obvious exaggeration, the term is a salute to the importance of the US consumer to the world economy. US private consumption typically accounts for close to one-fifth of global GDP. Economists estimate that pre-2008, when the US consumers were on a spending binge, a one percentage point increase in US growth typically boosted global growth by about 0.4 percentage points.[9]

The US has been the world’s biggest consuming country ever since it became the world’s largest economy with most of the world’s richest people, something that dates to the aftermath of World War 1. Perhaps the days of the US being the world’s biggest economy will pass but, even so, it will take longer for its role as the consumer of last resort to fade. It’s certainly true, though, that the US role as booster of global growth has dimmed a little. Three decades of rampant capitalism and the battering from the global financial crisis on employment and wages have reduced the relative spending power of the middle and lower classes in the US. Demographic changes mean the all-consuming baby boomers have moved on from the times in their life where their spending was at its maximum.
Maybe in a few decades Asia’s expanding middle class will take over the distinction of being the world’s consumer of last resort. But until then, it will be US consumers who hold sway over the world economy and global share markets. And investors will analyse events, including those in the Middle East, more for their impact on the US consumer than on anything else.
by Michael Collins, Investment Commentator at Fidelity

Financial information comes from Bloomberg unless stated otherwise.

 

[1] To find out more, see Federal Reserve time line “oil shock of 1973-74”. http://www.federalreservehistory.org/Events/DetailView/36

[2] To find out more, see Federal Reserve time line “oil shock of 1978-79”. http://www.federalreservehistory.org/Events/DetailView/40

[3] Opec. Opec share of world crude oil reserves 2012. http://www.opec.org/opec_web/en/data_graphs/330.htm

[4] Citigroup Global Markets. “Resurging North American oil production and the death of the peak oil hypothesis.” February 2012.

[5] Bloomberg News. “Ban on US oil exports seen dying one ruling at a time.” 19 July 2014. http://www.bloomberg.com/news/2014-07-17/u-s-oil-export-ban-seen-weakening-rather-than-dying.html

[6] US Energy Information Administration. “Short-term energy outlook. 12 August 2014. http://www.eia.gov/forecasts/steo/

[7] US Energy Information Administration. Op cit.

[8] US Energy Information Administration. “This week in petroleum. US refineries running at record levels.” For the week ending 11 July 2014. http://www.eia.gov/oog/info/twip/twiparch/2014/140723/twipprint.html

[9] Bloomberg News. “America’s role as consumer of last resort goes missing.” 3 December 2013. http://www.bloomberg.com/news/2013-12-01/consumer-of-last-resort-missing-as-u-s-leaves-the-world-behind.html

]]> Oil prices have responded to political volatility in the Gulf.

Oil prices have responded to political volatility in the Gulf.

In 1973, Egypt and Syria launched a surprise attack on Israel during the Jewish religious festival of Yom Kippur. The swift arrival of arms from the US helped Israel repel the assaults.

Opec nations, upset at US support for Israel, cut oil production and placed a sales embargo on the US and any European country that helped Washington funnel arms to Israel. Oil prices surged nearly 400% over the next 12 months in what became known as the first oil shock of 1973-74.  The result was the stagnation of the 1970s.[1]

In 1978, a revolution began in Iran that resulted in the Shah fleeing into exile the following year, during which time the new regime fermented trouble with the US culminating in the occupation of the US embassy in Tehran. The year 1979 was when Saddam Hussein gained dictatorial control of Iraq and protests gripped Saudi Arabia. Oil prices more than doubled from 1979 to 1980 in what became known as the second oil shock of 1979-80. Inflation in the US was 9% by year end, forcing new Federal Reserve Chairman Paul Volcker to raise the US cash rate from 11% to 19% from 1979 to 1981 to purge it. The economic cost was, at the time, the most severe US recession since the Great Depression.[2]Since the oil shocks of the 1970s, oil prices have spiked just about every time a crisis blazed in the Middle East. Prices jumped when Israel invaded Lebanon in 1982, after Iraq conquered Kuwait in 1990 and during the subsequent Iraq War of 1991 and around the US-led invasion of Iraq in 2003. They climbed whenever violence intensified during the two Palestinian Intifadas or uprisings of 1987 to 1991 and 2000 to 2005. They surged to a record high of about US$147 a barrel in 2008 when tensions surrounding Iran’s nuclear program and unrest in oil-producing Nigeria and Venezuela coincided with strong global growth.

Oil prices have responded to political volatility in the Gulf because 66% of the world’s known oil reserves are located in the Middle East Opec member countries; namely Iran, Iraq, Kuwait, Saudi Arabia, Qatar and the United Arab Emirates.[3] Often, oil prices would jump, almost irrationally on any flare-up around the globe, even if non-oil producers were involved, because they were treated as a bellwether of global instability.

In recent months, Russia, the world’s third-biggest producer of oil, has tussled with the west over Ukraine. The US military re-engaged in Iraq to fight Islamists after they seized about one-third of Iraq, a country that has 12% of Opec’s reserves, having already gained control of about a third of neighbouring and oil-producing (but non-Opec) Syria. Libya, with 4% of Opec’s reserves, descended into deeper chaos for the most part. For the third time in six years, Israel attacked Gaza, which is allied with Qatar, where 2% of Opec’s reserves lie. How much did oil prices jump during this turmoil, a time when global purchasing managers indices pointed to stronger global growth? Well, they fell. To the surprise of many, the US benchmark West Texas Intermediate dropped below US$100 a barrel in August – and fell as low as US$91.66 on September 1, its lowest in seven months – from an average of US$106 in June, while Brent Crude, which is the basis for what Europeans pay for oil, was at a 16-month low in early September when it dropped to US$100.34. Why? Largely due to the shale revolution in the US. A 55% surge in US oil production over the past six years that has boosted US output to about 10% of global production appears to have changed the supply-demand dynamics of global oil markets enough to weaken the sway the Middle East holds over prices as the so-called swing producer, a dynamic that is largely due to Saudi Arabia’s ability to alter production. The drop in oil price – and the resulting absence of any dent to US consumer spending – is one of the reasons why global stock markets withstood the crises of recent months. Indications are that the US shale revolution will help insulate the global economy from political upheavals in the Middle East in coming years.

Oil prices in July and August might well have been lower if the Middle East had been calmer. Not all the recent decline in oil prices is tied to the US shale revolution. Oil prices also slid because Libya in July reopened an oil-exporting port that had been closed by rebels for 12 months. As well, Washington’s decision to bomb the Islamic militants in Iraq reduced the political risks to Iraq’s oil industry. The Islamists in their self-declared caliphate are selling cheap oil from captured wells, as are the Kurds from their autonomous part of Iraq. More longer term, greater fuel efficiency and a switch to renewable energy are reducing demand for oil, so it’s not just shale lowering the price. Events in the Middle East could always spiral out of control enough to boost oil prices, no matter what US shale-related production might be, especially if Iraq’s southern oil fields were captured by Islamists or Saudi Arabia became unstable. (Don’t rule it out.) Ructions elsewhere could ignite oil prices, especially in Ukraine. The growing appetite of the emerging world, especially of China, for Middle East oil could rejig the demand-supply equation more in favour of Opec. Still, the decline in oil prices in July and August shows the US shale revolution is insulation against Middle-East turbulence these days. This gives investors one less worry when they scan the risks ahead.

The last resort

The US shale revolution came about because mining engineers worked out that horizontal drilling and hydraulic fracturing (or “fracking”) allowed them to extract the oil and natural gas that are trapped in layers of sedimentary rock. While there are large shale reserves around the world, only in the US was the extensive pipeline infrastructure, technical know-how, ample water and favourable tax and regulatory regimes in place to enable the new technology to be exploited.

Thanks to fracking, the US arrested years of declining oil production and boosted output enough to become a net exporter of refined oil products for the first time in 60 years[4] – franking is even leading to the end of the ban on crude oil exports in place since 1975 as exceptions are being allowed.[5] Statistics from the US’ Energy Information Administration show that US crude oil production averaged 8.5 million barrels per day in July this year, the highest monthly output in 27 years and about 3.5 million barrels a day more than in 2008. The statistical arm of the US Energy Department expects US crude production to reach 9.3 million barrels a day in 2015, a prediction that, if fulfilled, would represent the highest output since 1972.[6]

All this extra production reduces the US’ reliance on imported oil and often forces Opec and other oil-exporting countries to discount in their search for replacement markets. The surge in US domestic production cut US oil imports to 7.17 million barrels a day of crude in May this year, a 26% decline from six years earlier. The share of US petroleum needs met by net imports dropped to 33% in 2013 from 60% in 2005. The Energy Information Administration “expects the net import share to decline to 22% in 2015, which would be the lowest level since 1970”.[7]

The US motorist is enjoying the benefits of the US shale revolution. Petrol prices fell 8 US cents a gallon (or 3.2 US cents a litre) to US$3.61 in July from June, as global oil prices slid. (Did you notice how cheap petrol has been in Australia lately?) The Energy Information Administration is predicting retail prices to decline to US$3.30 a gallon by December, a prediction that is all the more surprising because demand for crude in the US is at a record high. In April 2014, US demand for petroleum products was 187,000 barrels a day higher than a year earlier thanks to faster economic growth fanning activity.[8]

The ones you can rely on

Wondering why global stocks as well as US equities benefited from these lower US petrol prices? The answer is that US consumers still play the most pivotal role in the world economy.

Investors everywhere prioritise tracking the US economy because the US citizen is what economists refer to as the world’s “consumer of last resort”. If you take the term literally, it means that companies can always export their produce to the US if people elsewhere aren’t spending. While that’s an obvious exaggeration, the term is a salute to the importance of the US consumer to the world economy. US private consumption typically accounts for close to one-fifth of global GDP. Economists estimate that pre-2008, when the US consumers were on a spending binge, a one percentage point increase in US growth typically boosted global growth by about 0.4 percentage points.[9]

The US has been the world’s biggest consuming country ever since it became the world’s largest economy with most of the world’s richest people, something that dates to the aftermath of World War 1. Perhaps the days of the US being the world’s biggest economy will pass but, even so, it will take longer for its role as the consumer of last resort to fade. It’s certainly true, though, that the US role as booster of global growth has dimmed a little. Three decades of rampant capitalism and the battering from the global financial crisis on employment and wages have reduced the relative spending power of the middle and lower classes in the US. Demographic changes mean the all-consuming baby boomers have moved on from the times in their life where their spending was at its maximum.
Maybe in a few decades Asia’s expanding middle class will take over the distinction of being the world’s consumer of last resort. But until then, it will be US consumers who hold sway over the world economy and global share markets. And investors will analyse events, including those in the Middle East, more for their impact on the US consumer than on anything else.
by Michael Collins, Investment Commentator at Fidelity

Financial information comes from Bloomberg unless stated otherwise.

 

[1] To find out more, see Federal Reserve time line “oil shock of 1973-74”. http://www.federalreservehistory.org/Events/DetailView/36

[2] To find out more, see Federal Reserve time line “oil shock of 1978-79”. http://www.federalreservehistory.org/Events/DetailView/40

[3] Opec. Opec share of world crude oil reserves 2012. http://www.opec.org/opec_web/en/data_graphs/330.htm

[4] Citigroup Global Markets. “Resurging North American oil production and the death of the peak oil hypothesis.” February 2012.

[5] Bloomberg News. “Ban on US oil exports seen dying one ruling at a time.” 19 July 2014. http://www.bloomberg.com/news/2014-07-17/u-s-oil-export-ban-seen-weakening-rather-than-dying.html

[6] US Energy Information Administration. “Short-term energy outlook. 12 August 2014. http://www.eia.gov/forecasts/steo/

[7] US Energy Information Administration. Op cit.

[8] US Energy Information Administration. “This week in petroleum. US refineries running at record levels.” For the week ending 11 July 2014. http://www.eia.gov/oog/info/twip/twiparch/2014/140723/twipprint.html

[9] Bloomberg News. “America’s role as consumer of last resort goes missing.” 3 December 2013. http://www.bloomberg.com/news/2013-12-01/consumer-of-last-resort-missing-as-u-s-leaves-the-world-behind.html

The post The surprise for investors during the Middle East flare-ups appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2014/09/surprise-investors-middle-east-flare-ups/feed/ 0 Price war: Petrol selling below cost price https://www.adviservoice.com.au/2011/03/price-war-petrol-selling-below-cost-price/ https://www.adviservoice.com.au/2011/03/price-war-petrol-selling-below-cost-price/#respond Mon, 28 Mar 2011 05:29:32 +0000 https://adviservoice.com.au/?p=6764 Weekly Petrol Price

  • According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol fell by 0.2 cents per litre to 143.0 cents a litre in the week to March 27.
  • Adelaide’s petrol price war has entered a second week with petrol selling at or below the wholesale price. The average Adelaide petrol price was $1.35 a litre modestly below the wholesale (terminal gate) price. In contrast the average unleaded price in Canberra neared $1.50 a litre.
  • The Australian dollar continues to be a boon for motorists. Had the Aussie remained around 83 cents – where it was around ten months ago- motorists would be paying an additional 28 – 30 cents a litre for fuel.
  • The Aussie remains well above USD102 cents and if it is able to hold around current levels pump prices should ease by around 2 cents a litre in a fortnight’s time.

What does it all mean?

  • After rising for five consecutive week’s petrol prices have finally topped out, with the national average petrol price easing in the last week. However cheaper fuel prices was not the norm across all capital cities with Perth, Hobart and Darwin actually recording a price increase. Hobart prices are now the highest across major cities with the average price holding just shy of $1.50 a litre.
  • Interestingly motorists in Adelaide are reaping the benefits of a petrol price war that started a fortnight ago – and was largely driven by a breakdown of the weekly discounting cycle. Over the past two weeks Adelaide motorists have been in a happy position of being able to buy petrol at effectively below the cost price. The wholesale (terminal gate) price has held near $1.35 a litre, but motorists have been generally able to purchase fuel for around $1.30 – $1.35 a litre and even cheaper when discount vouchers are used.
  • We can only speculate about the reasons for the cheaper fuel, but it would seem that intense competition is a key driver behind the petrol price war. While at present it is only taking place in Adelaide the petrol price cycle has also been disrupted in other capital cities on several occasions over the past year, so there is a risk that the petrol price war could spread, especially to cities like Melbourne, Brisbane and Sydney that have recognised weekly discounting cycles.

  • The strength of the Australian dollar has also been a boon for motorists over the past year, curbing the impact of higher global oil prices on domestic pump prices. And given the surge in the Aussie over the last couple of days it is likely to play an even more important role in near term, insulating the domestic economy from higher global prices. Interestingly the Singapore unleaded price recorded a modest increase in US dollar terms over the past week, however in Australian dollar terms the Singapore unleaded price has slumped by almost $2.60 a barrel – a result that should filter through to motorists in a fortnights time. CommSec expects pump prices to ease by around2 cents a litre in the next fortnight.

What do the figures show?

Petrol prices:

  • According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol fell by 0.2 cents a litre to 143.0 cents a litre in the week to March 28. The metropolitan price fell by 0.6 c/l to 142.3 c/l, while the regional average price rose by 0.7 c/l to 144.5 c/l.
  • Average petrol prices across states over the past week were: Sydney (down 1.0 cents to 142.5 c/l), Melbourne (down 1.2 cents to 141.2 c/l), Brisbane (down 0.5 cents to 145.4 c/l), Adelaide (down 0.2 cents to 134.8 c/l), Perth (up 0.3 cents to 143.3 c/l), Darwin (up 0.7 cents to 147.0 c/l), Canberra (down 1.4 cents to 147.2 c/l) and Hobart (up 3.7 cents to 149.8 c/l)
  • The national average wholesale (terminal gate) has risen to a fresh 29-month high of 135.7 cents a litre today, risen by 1.3 cents a litre over the past week.
  • Last week, the key Singapore unleaded petrol price rose by US$0.70 (0.6 per cent) to US$122.60 a barrel. However in Australian dollar terms the Singapore gasoline price fell by $2.57 (2.10 per cent) over the week to $120.11 a barrel.

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.

What are the implications for interest rates and investors?

  • For Adelaide motorists, the petrol price war is clearly good news in the short-term. But if competition is reduced as a consequence then it could potentially lead to higher prices in the future. For independent operators, an on-going price war is a key risk to viability. For investors, the petrol price machinations have implications for listed companies like Caltex, Wesfarmers (Coles) and Woolworths in terms of sales, margins and profitability.
  • The political instability in the Middle East and North Africa is the key driver of near term prices. And with pump prices holding near 29-month highs, the current conservative behaviour of consumers is likely to remain part of the economic landscape in the near term. Our equity analysts are maintaining HOLD recommendations for both Woolworths and Wesfarmers.

Produced by Commonwealth Research based on information available at the time of publishing. We believe that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held or made as at the time of its compilation, but no warranty is made as to accuracy, reliability or completeness. To the extent permitted by law, neither Commonwealth Bank of Australia ABN 48 123 123 124 nor any of its subsidiaries accept liability to any person for loss or damage arising from the use of this report.

The report has been prepared without taking account of the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. In the case of certain securities Commonwealth Bank of Australia is or may be the only market maker.

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Commonwealth Bank of Australia and its subsidiaries have effected or may affect transactions for their own account in any investments or related investments referred to in this report.

]]> Weekly Petrol Price

  • According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol fell by 0.2 cents per litre to 143.0 cents a litre in the week to March 27.
  • Adelaide’s petrol price war has entered a second week with petrol selling at or below the wholesale price. The average Adelaide petrol price was $1.35 a litre modestly below the wholesale (terminal gate) price. In contrast the average unleaded price in Canberra neared $1.50 a litre.
  • The Australian dollar continues to be a boon for motorists. Had the Aussie remained around 83 cents – where it was around ten months ago- motorists would be paying an additional 28 – 30 cents a litre for fuel.
  • The Aussie remains well above USD102 cents and if it is able to hold around current levels pump prices should ease by around 2 cents a litre in a fortnight’s time.

What does it all mean?

  • After rising for five consecutive week’s petrol prices have finally topped out, with the national average petrol price easing in the last week. However cheaper fuel prices was not the norm across all capital cities with Perth, Hobart and Darwin actually recording a price increase. Hobart prices are now the highest across major cities with the average price holding just shy of $1.50 a litre.
  • Interestingly motorists in Adelaide are reaping the benefits of a petrol price war that started a fortnight ago – and was largely driven by a breakdown of the weekly discounting cycle. Over the past two weeks Adelaide motorists have been in a happy position of being able to buy petrol at effectively below the cost price. The wholesale (terminal gate) price has held near $1.35 a litre, but motorists have been generally able to purchase fuel for around $1.30 – $1.35 a litre and even cheaper when discount vouchers are used.
  • We can only speculate about the reasons for the cheaper fuel, but it would seem that intense competition is a key driver behind the petrol price war. While at present it is only taking place in Adelaide the petrol price cycle has also been disrupted in other capital cities on several occasions over the past year, so there is a risk that the petrol price war could spread, especially to cities like Melbourne, Brisbane and Sydney that have recognised weekly discounting cycles.

  • The strength of the Australian dollar has also been a boon for motorists over the past year, curbing the impact of higher global oil prices on domestic pump prices. And given the surge in the Aussie over the last couple of days it is likely to play an even more important role in near term, insulating the domestic economy from higher global prices. Interestingly the Singapore unleaded price recorded a modest increase in US dollar terms over the past week, however in Australian dollar terms the Singapore unleaded price has slumped by almost $2.60 a barrel – a result that should filter through to motorists in a fortnights time. CommSec expects pump prices to ease by around2 cents a litre in the next fortnight.

What do the figures show?

Petrol prices:

  • According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol fell by 0.2 cents a litre to 143.0 cents a litre in the week to March 28. The metropolitan price fell by 0.6 c/l to 142.3 c/l, while the regional average price rose by 0.7 c/l to 144.5 c/l.
  • Average petrol prices across states over the past week were: Sydney (down 1.0 cents to 142.5 c/l), Melbourne (down 1.2 cents to 141.2 c/l), Brisbane (down 0.5 cents to 145.4 c/l), Adelaide (down 0.2 cents to 134.8 c/l), Perth (up 0.3 cents to 143.3 c/l), Darwin (up 0.7 cents to 147.0 c/l), Canberra (down 1.4 cents to 147.2 c/l) and Hobart (up 3.7 cents to 149.8 c/l)
  • The national average wholesale (terminal gate) has risen to a fresh 29-month high of 135.7 cents a litre today, risen by 1.3 cents a litre over the past week.
  • Last week, the key Singapore unleaded petrol price rose by US$0.70 (0.6 per cent) to US$122.60 a barrel. However in Australian dollar terms the Singapore gasoline price fell by $2.57 (2.10 per cent) over the week to $120.11 a barrel.

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.

What are the implications for interest rates and investors?

  • For Adelaide motorists, the petrol price war is clearly good news in the short-term. But if competition is reduced as a consequence then it could potentially lead to higher prices in the future. For independent operators, an on-going price war is a key risk to viability. For investors, the petrol price machinations have implications for listed companies like Caltex, Wesfarmers (Coles) and Woolworths in terms of sales, margins and profitability.
  • The political instability in the Middle East and North Africa is the key driver of near term prices. And with pump prices holding near 29-month highs, the current conservative behaviour of consumers is likely to remain part of the economic landscape in the near term. Our equity analysts are maintaining HOLD recommendations for both Woolworths and Wesfarmers.

Produced by Commonwealth Research based on information available at the time of publishing. We believe that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held or made as at the time of its compilation, but no warranty is made as to accuracy, reliability or completeness. To the extent permitted by law, neither Commonwealth Bank of Australia ABN 48 123 123 124 nor any of its subsidiaries accept liability to any person for loss or damage arising from the use of this report.

The report has been prepared without taking account of the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. In the case of certain securities Commonwealth Bank of Australia is or may be the only market maker.

This report is approved and distributed in Australia by Commonwealth Securities Limited ABN 60 067 254 399 a wholly owned but not guaranteed subsidiary of Commonwealth Bank of Australia. This report is approved and distributed in the UK by Commonwealth Bank of Australia incorporated in Australia with limited liability. Registered in England No. BR250 and regulated in the UK by the Financial Services Authority (FSA). This report does not purport to be a complete statement or summary. For the purpose of the FSA rules, this report and related services are not intended for private customers and are not available to them.

Commonwealth Bank of Australia and its subsidiaries have effected or may affect transactions for their own account in any investments or related investments referred to in this report.

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]]> https://www.adviservoice.com.au/2011/03/price-war-petrol-selling-below-cost-price/feed/ 0 Rising oil prices – what is the tipping point for growth? https://www.adviservoice.com.au/2011/03/rising-oil-prices-%e2%80%93-what-is-the-tipping-point-for-growth/ https://www.adviservoice.com.au/2011/03/rising-oil-prices-%e2%80%93-what-is-the-tipping-point-for-growth/#respond Thu, 24 Mar 2011 08:27:53 +0000 https://adviservoice.com.au/?p=6719

Key points

  • Global oil prices remain under upward pressure from turmoil in the Middle East and North Africa. This will dampen global growth and add to the financial pressure on Australian households.
  • The global and Australian economies and share markets can probably live with current oil price levels. However, a sustained sharp rise in the oil price to $US140 would make life a lot more difficult.

Oil prices are surging again

After a dip last week on the back of the tragedy in Japan the US West Texas Intermediate oil price is back above $US105 a barrel and Asian Tapis oil prices are around $US120 a barrel.

Source: Thomson Financial, AMP Capital Investors

Increasing tensions in the Middle East and North Africa (MENA) have been the primary driver, with the US and various European countries now intervening militarily in Libya to enforce a no fly zone, along with escalating tensions in Bahrain, Yemen and Saudi Arabia. The tensions between Sunni rulers and Shiites in Bahrain risk a further escalation, possibly drawing in Shiite dominated areas in Saudi Arabia and Shiite dominated Iran.

In addition, the lessening of the risk of a full blown nuclear meltdown in Japan has shifted the focus back to increased oil demand from Japan in order to make up for reduced nuclear power production and as part of rebuilding demand following the earthquake. This is all occurring at a time when global demand for oil is rising on the back of the global economic recovery and a long term deterioration in the pace of new oil discoveries.

The rise in the oil prices is pushing up energy costs world wide. Australia is no exception, and the rise to date has pushed up local petrol prices to an average of around $1.45 a litre. As can be seen in the next chart there is a pretty close relationship between the local petrol price and the world oil price in Australian dollars. Roughly each $US10 a barrel rise in the world oil price translates to around an 8 cents a litre increase in Australian petrol prices. If world oil prices stay at current levels expect petrol prices to rise another 3 to 5 cents over the next few weeks.

Source: Thomson Financial, AMP Capital Investors

The war in Libya has affected most of its normal 1.8 million barrels per day of oil production. Prior to the unrest in the Middle East, OPEC had 5 million barrels a day of spare oil capacity and so Saudi Arabia and other gulf states have been able to make up for lost Libyan production.

Source: Bloomberg, AMP Capital Investors

However, Libyan crude oil is light and cheaper to refine compared to the heavy Saudi oil grades, so this has added to the price of light oil grades such as Brent and Tapis. Secondly, while OPEC can make up for lost Libyan production it, would only take a spreading of unrest and production disruptions to say Kuwait, Iran or part of Saudi Arabia to wipe out all of the spare capacity. Finally, some suspect Saudi Arabia may be exaggerating its spare capacity. So it’s little wonder the oil price contains a risk premium, estimated to be around $US10-15 a barrel. If the unrest spreads, a further increase in oil prices is likely.

While not experts on the Middle East, our sense is that, although the turmoil will continue to bubble on for a while, further significant oil supply disruption will be avoided. As such the issue will become background noise for global investment markets. However, as the risks are skewed towards more disruption and higher oil prices its worth considering at what level the surge in the oil price would create a problem for the economic outlook.

At what level will the oil price become a problem?

It’s true that past surges in world oil prices have preceded US recessions and sharp global downturns. See next chart.

Source: Thomson Financial, AMP Capital Investors

However, other factors have also been involved – notably significant monetary tightening, and we are not seeing that now. Much of the rise over the last two years has also been due to stronger demand with supply concerns only adding $US10-15 a barrel this year. It’s also the change in the oil price that matters, not its level, as businesses and consumers gradually get used to higher oil prices. Trouble normally ensues if the oil price doubles over 12 months. We are not quite there yet. Our assessment is that the world can probably live with oil around $US100 a barrel, and we expected it to reach that level this year anyway.

The following table estimates the impact on GDP growth of a $US10 rise in the price of oil for the year ahead in the second column and then applying that to the impact of oil at $US110 a barrel and $US140 a barrel.

Impact on GDP growth of rising oil prices, % points


* Relative to a base case of $US100. Source: IEA, IMF, OECD, AMP Capital Investors

Global growth this year is currently forecast to be around 4.3% by the IMF so if the world oil price settles around $US110 a barrel then global growth would be reduced by around 0.4% but would still be solid at around 3.9%.

However, a sustained spike to $US140 a barrel would be much more worrying as it would slice around 1.6% off world growth, 1.2% off US growth and 1% off Australian growth. Asia is the most vulnerable, reflecting its heavy reliance on imported oil and its more intensive oil use. Australia is less vulnerable as it is a net energy exporter.

The rise in the oil price will also boost inflation with roughly a $US10 a barrel rise adding 0.5% to inflation in the US and Australia and 0.7% to inflation in Asia.

What would central banks focus on – inflation or growth? The European Central Bank is more likely to focus on headline inflation and so raise interest rates as it is threatening to do. However, the US Federal Reserve is likely to see a fuel inspired boost to inflation as temporary and would probably give more weight to weaker growth.

At this stage it’s too early to get overly worried given that it’s quite possible that significant tensions in the Middle East and North Africa will be confined to current countries. Just as the much feared nuclear meltdown didn’t happen a week ago, a worst case oil price surge may be avoided. The bottom line is that current oil price levels are probably not enough to derail the global recovery. However, if oil prices rise to $US140 a barrel the threat would be significant – both via the direct hit to growth and the indirect hit if central banks in some countries respond to higher inflation via interest rate hikes.

What about Australia?

For Australia, the strong Australian dollar is acting as a buffer against the rising oil price. Australia is also a net energy exporter and so the rise in the oil price is providing a boost to national income via higher gas and steaming coal prices. We also see the RBA giving more weight to the growth reducing impact of higher oil prices rather than the boost to headline inflation and so don’t see it responding with a rate hike, providing underlying inflation stays benign.

The real problem for Australia is that the rise in oil and petrol prices will add to consumer caution. While higher energy prices boost national income, and hence resource sector investment, the rise in petrol prices over the last month has already added another $5 a week to the weekly petrol bill for a typical Australian family. It is now just $10 a week below the 2008 high.  Coming on the back of solid increases in costs for electricity, insurance, fresh food and education this will only cut further into consumer discretionary spending power. More bad news for retailers.

Source: AMP Capital Investors

Implications for shares

The surge in oil prices is great news for energy shares, but not so good for the rest of the share market. However, shares can probably still perform well with current oil price levels, helped by the improvement in valuations after the recent correction. However, a sustained sharp rise in the oil price to around $US140 would make life a lot more difficult.

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.
]]>

Key points

  • Global oil prices remain under upward pressure from turmoil in the Middle East and North Africa. This will dampen global growth and add to the financial pressure on Australian households.
  • The global and Australian economies and share markets can probably live with current oil price levels. However, a sustained sharp rise in the oil price to $US140 would make life a lot more difficult.

Oil prices are surging again

After a dip last week on the back of the tragedy in Japan the US West Texas Intermediate oil price is back above $US105 a barrel and Asian Tapis oil prices are around $US120 a barrel.

Source: Thomson Financial, AMP Capital Investors

Increasing tensions in the Middle East and North Africa (MENA) have been the primary driver, with the US and various European countries now intervening militarily in Libya to enforce a no fly zone, along with escalating tensions in Bahrain, Yemen and Saudi Arabia. The tensions between Sunni rulers and Shiites in Bahrain risk a further escalation, possibly drawing in Shiite dominated areas in Saudi Arabia and Shiite dominated Iran.

In addition, the lessening of the risk of a full blown nuclear meltdown in Japan has shifted the focus back to increased oil demand from Japan in order to make up for reduced nuclear power production and as part of rebuilding demand following the earthquake. This is all occurring at a time when global demand for oil is rising on the back of the global economic recovery and a long term deterioration in the pace of new oil discoveries.

The rise in the oil prices is pushing up energy costs world wide. Australia is no exception, and the rise to date has pushed up local petrol prices to an average of around $1.45 a litre. As can be seen in the next chart there is a pretty close relationship between the local petrol price and the world oil price in Australian dollars. Roughly each $US10 a barrel rise in the world oil price translates to around an 8 cents a litre increase in Australian petrol prices. If world oil prices stay at current levels expect petrol prices to rise another 3 to 5 cents over the next few weeks.

Source: Thomson Financial, AMP Capital Investors

The war in Libya has affected most of its normal 1.8 million barrels per day of oil production. Prior to the unrest in the Middle East, OPEC had 5 million barrels a day of spare oil capacity and so Saudi Arabia and other gulf states have been able to make up for lost Libyan production.

Source: Bloomberg, AMP Capital Investors

However, Libyan crude oil is light and cheaper to refine compared to the heavy Saudi oil grades, so this has added to the price of light oil grades such as Brent and Tapis. Secondly, while OPEC can make up for lost Libyan production it, would only take a spreading of unrest and production disruptions to say Kuwait, Iran or part of Saudi Arabia to wipe out all of the spare capacity. Finally, some suspect Saudi Arabia may be exaggerating its spare capacity. So it’s little wonder the oil price contains a risk premium, estimated to be around $US10-15 a barrel. If the unrest spreads, a further increase in oil prices is likely.

While not experts on the Middle East, our sense is that, although the turmoil will continue to bubble on for a while, further significant oil supply disruption will be avoided. As such the issue will become background noise for global investment markets. However, as the risks are skewed towards more disruption and higher oil prices its worth considering at what level the surge in the oil price would create a problem for the economic outlook.

At what level will the oil price become a problem?

It’s true that past surges in world oil prices have preceded US recessions and sharp global downturns. See next chart.

Source: Thomson Financial, AMP Capital Investors

However, other factors have also been involved – notably significant monetary tightening, and we are not seeing that now. Much of the rise over the last two years has also been due to stronger demand with supply concerns only adding $US10-15 a barrel this year. It’s also the change in the oil price that matters, not its level, as businesses and consumers gradually get used to higher oil prices. Trouble normally ensues if the oil price doubles over 12 months. We are not quite there yet. Our assessment is that the world can probably live with oil around $US100 a barrel, and we expected it to reach that level this year anyway.

The following table estimates the impact on GDP growth of a $US10 rise in the price of oil for the year ahead in the second column and then applying that to the impact of oil at $US110 a barrel and $US140 a barrel.

Impact on GDP growth of rising oil prices, % points


* Relative to a base case of $US100. Source: IEA, IMF, OECD, AMP Capital Investors

Global growth this year is currently forecast to be around 4.3% by the IMF so if the world oil price settles around $US110 a barrel then global growth would be reduced by around 0.4% but would still be solid at around 3.9%.

However, a sustained spike to $US140 a barrel would be much more worrying as it would slice around 1.6% off world growth, 1.2% off US growth and 1% off Australian growth. Asia is the most vulnerable, reflecting its heavy reliance on imported oil and its more intensive oil use. Australia is less vulnerable as it is a net energy exporter.

The rise in the oil price will also boost inflation with roughly a $US10 a barrel rise adding 0.5% to inflation in the US and Australia and 0.7% to inflation in Asia.

What would central banks focus on – inflation or growth? The European Central Bank is more likely to focus on headline inflation and so raise interest rates as it is threatening to do. However, the US Federal Reserve is likely to see a fuel inspired boost to inflation as temporary and would probably give more weight to weaker growth.

At this stage it’s too early to get overly worried given that it’s quite possible that significant tensions in the Middle East and North Africa will be confined to current countries. Just as the much feared nuclear meltdown didn’t happen a week ago, a worst case oil price surge may be avoided. The bottom line is that current oil price levels are probably not enough to derail the global recovery. However, if oil prices rise to $US140 a barrel the threat would be significant – both via the direct hit to growth and the indirect hit if central banks in some countries respond to higher inflation via interest rate hikes.

What about Australia?

For Australia, the strong Australian dollar is acting as a buffer against the rising oil price. Australia is also a net energy exporter and so the rise in the oil price is providing a boost to national income via higher gas and steaming coal prices. We also see the RBA giving more weight to the growth reducing impact of higher oil prices rather than the boost to headline inflation and so don’t see it responding with a rate hike, providing underlying inflation stays benign.

The real problem for Australia is that the rise in oil and petrol prices will add to consumer caution. While higher energy prices boost national income, and hence resource sector investment, the rise in petrol prices over the last month has already added another $5 a week to the weekly petrol bill for a typical Australian family. It is now just $10 a week below the 2008 high.  Coming on the back of solid increases in costs for electricity, insurance, fresh food and education this will only cut further into consumer discretionary spending power. More bad news for retailers.

Source: AMP Capital Investors

Implications for shares

The surge in oil prices is great news for energy shares, but not so good for the rest of the share market. However, shares can probably still perform well with current oil price levels, helped by the improvement in valuations after the recent correction. However, a sustained sharp rise in the oil price to around $US140 would make life a lot more difficult.

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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