Nathan Lim

Since breaking the psychological US$100 level in September, Brent crude oil has fallen 34%. Strangely, the Ardour Solar Index has also fallen the same amount over this same period. What the heck does the oil price have to do with solar?

Only 5% of crude oil is used to produce electricity globally and much of this is occurring in the Middle East where crude oil is cheap and abundant. Crude oil power generation is simply not a significant end market because it is not growing and is utilised mostly in regions with unique circumstances i.e. an abundance of cheap oil.

Crude oil is significant in transportation with 64% of it used to move planes, trains, ships, cars and trucks. This is clearly one area where solar has little influence at this point in time as electric cars remain well below 1% of the global vehicle fleet (perhaps even as low as 0.1%).

Electricity generation is the strongest area of growth for solar. Rooftop solar installations are by far the most exciting area given that unsubsidised panels are becoming increasingly competitive globally. This dynamic has been dubbed “grid parity” by solar supporters. For example in Australia, even without any financial assistance, the retail price of electricity is so high that the payback on a typical solar installation is well under 10 years  and can be as short as 6 years with small scale technology certificates (STC). Homeowners are recognising that using solar to meet even a portion of their total energy needs makes financial sense. It is this change in mindset that is driving adoption.

At the wholesale level, Dubai has just set a new global low for the price of electricity generated from solar, signing a power purchase agreement at 5.98 cents per kilowatt hour. This is cheaper than either coal or natural gas power generation. This follows auctions in Brazil that achieved a price of 8.7 cents which is only modest higher than the 7.8-8 cents signed with fossil and biomass fuelled power plants.

Solar has nil emissions so in an environment where governments are seeking to lower the emissions intensity of their economies, renewable energy already has a well-defined role in future planning.

The permitting and construction time for even large scale solar projects is a fraction of the time needed for conventional power plants. A conventional power plant can see the permitting process stretch out for years as rigorous environmental studies need to be conducted to protect wildlife and safeguard against emissions. The low environmental footprint of a large scale solar project (never mind the virtually nil impact of a solar panel on a rooftop) helps to speed along the permitting process. This means projects can be deployed quickly and with minimal impact on the environment or the neighbourhood. From a developer’s point of view, a solar project has lower execution risk than say a coal-fired power plant.

In summary:

• Solar does not compete with crude oil for electricity generation
• Solar dovetails into government policy seeking to reduce the emissions intensity of the economy
• Solar is becoming increasingly price competitive in more places around the world without subsidy
• Solar projects are lower risk and relatively quick to build

Given this, it makes no sense to see solar shares being sold off with the fall in the oil price.

Nathan Lim, Australian Ethical Investment’s International Equities Trust 

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Standard Life Investments weekly economic briefing

There was a whiff of panic in markets at times last week.

Equities and oil prices took a hit, long-term government bond yields fell across the developed world, emerging market and high yield credit spreads widened, while the dollar climbed further.

The initial catalyst for this bout of risk aversion was a round of disappointing manufacturing PMIs in September, which brought into question expectations that the global economy is on an improving trend. Negative sentiment was then reinforced by the ECB’s failure to reveal the likely size of its asset-backed securities purchase programme, together with the perception that Draghi was hedging his commitment to return the central bank’s balance sheet to its early 2012 size.

It wasn’t until the US employment and non-manufacturing ISM reports surprised to the upside that risk appetite recovered.

So, how worried should investors be about the outlook for growth? Well, it is true that global manufacturing sentiment has lost some momentum in recent months. Besides the usual suspects in the Eurozone, sentiment fell back in most of developing Asia, as well as the US and UK which had been leading the pack.

This dovetails with the hard global industrial production and goods trade data which are displaying only modest growth. Meanwhile, consensus forecasts for 2014 have been downgraded for most G20 countries and expectations for 2015 are now starting to be downgraded as well (see chart 1 in the attached).

Yet there is no need for panic. Manufacturing PMIs receive a lot of attention from market participants, but the services sector makes up a much larger proportion of global economic activity.

In this sector, sentiment is holding up much better. Regular readers will know that we have never been bulls on the Eurozone’s growth prospects but even here investors have to be patient as it will take time for the weaker currency and recent monetary policy initiatives to feed through to the real economy.

If there is a moral to this story it is that strong US growth is still necessary but no longer sufficient to generate strong global growth.

From the US side, growth is not as import-intensive as it was in the past. And even if it were, much of the rest of the world is suffering under the weight of a variety imbalances and structural headwinds that cannot be solved by stronger US demand.

Click here to read to full Standard Life Investments Weekly Economic Briefing.

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Last year a similar surge in the oil price left global growth weak and vulnerable to European and US debt scares in the September quarter. So what is the risk this time around?

What’s behind the latest surge in oil prices?
The latest surge in oil prices reflects three key developments. First, we are seeing a long term structural rise in oil demand in the emerging world on the back of rapid industrialisation in key countries, including China.

This likely has much further to go as annual oil consumption is just 2.5 barrels per person in China and just one barrel per person in India compared to around 15 barrels per person in Australia and 24 in the US. So while oil demand growth is weak in developed countries reflecting poor growth, energy efficiencies and the growth of alternatives it remains strong in the emerging world. See the previous chart. As a result the developing world now accounts for a greater share of world oil consumption than do developed countries.

As the Peak Oil crowd have been pointing out for years growth in demand for oil is exceeding that of new supply.

The end result has been a rise in the equilibrium price of oil. OPEC countries appear to be reinforcing this as falls in the oil price below $US100 a barrel have been met with supply cutbacks as OPEC countries seek to maintain their revenue flow in order to fund stepped up public spending.
Secondly, oil prices have benefitted from an improvement in the global growth outlook. This has been seen in most growth assets – shares, commodities, the $A – which have all rebounded over the last few months and oil has been caught up in this. This has been accentuated more recently by a renewed fall in the $US, since oil is priced in US dollars.

Finally, we have seen a renewed rise in the geopolitical risk premium associated with tension in the Middle East. Iran is at the centre of this with western countries moving to impose an embargo on Iranian oil and Iran in turn threatening to close the Strait of Hormuz. At the same time the civil war in Syria is worsening bringing with it the risk of western intervention which in turn runs the risk of further inflaming tensions in the Middle East as Syria is an Iranian ally. Syria not a big oil exporter, but Iran exports roughly 2.5 million barrels a day compared to global oil production of 90 million barrels a day, posing a bigger threat than Libya last year which exported 1.5 million barrels a day. This can be made up for by Saudi Arabia which has roughly 2 million barrels a day of spare capacity. A bigger problem would arise if Iran did “close” the Strait of Hormuz as some 16 million barrels (or 18%) of world oil production flows though it each day.

The question then becomes how far Iran is prepared to go before it backs down. Economic pressure on Iran is mounting and the current Iranian regime would probably not like to go the way of Sadam Hussein’s Iraq or Colonel Qaddafi’s Libya. Then again I am not a Middle East political expert.

Oil prices and the global economy
What happens if the situation regarding Iran continues to escalate? Past oil price surges have clearly played a role in triggering US & global downturns. See the next chart.

It’s not so much the oil price level that counts as its rate of change, as businesses and consumers get used to higher prices over time. Trouble normally ensues if the oil price doubles over 12 months and we are nowhere near that – West Texas Intermediate (which is constrained by a US oil production surge and transport constraints) is up 10% year on year, Brent is up 9% and Tapis is up 15%.

US household spending on energy as a share of income is not historically high and the oil price surge has occurred when the labour market is improving. Our view is that the world can probably live with West Texas Intermediate at around $US110 a barrel (or Brent around $US120). The following table estimates the impact on GDP 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 $US120 a barrel and $US150 a barrel.

Global growth this year is currently forecast to be around 3% so if the world oil price (WTI) settles around $US120 a barrel then global growth would be reduced to around 2.6%, ie soft but not disastrous. However, a sustained spike to $US150 a barrel would be much more worrying. 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. Given the negative growth impact though, it’s hard to see central banks reacting.
The bottom line is that current oil price levels are probably not enough to derail the global recovery. However, if oil prices rise to $US150 a barrel the threat would be significant.

Impact on Australia
While the strong $A acts as a buffer, the protection is partial as so far this year the Asian Tapis oil price is up 13.8% in US dollars whereas the Australian dollar is up only 5.8%. Australian petrol prices have already risen to around $1.46 a litre (with a range of around $1.40 to $1.50) and at current oil price levels a further rise in the weekly average petrol price to around $1.53 a litre is likely.

While this will add to headline inflation, the flow on to core inflation is likely to be modest reflecting constrained corporate pricing power. The more significant impact will be the blow to household spending power implied by higher petrol prices. The rise in petrol prices this year has already pushed the typical Australian family’s weekly petrol bill up to around $51, which is its highest level since July 2008.

Coming at a time of rising prices for necessities such as rent, utilities, health, insurance and education this will further limit the ability of households to buy discretionary items. So tough times may continue for discretionary retailers for a while yet.

Implications for shares
The surge in oil prices is great for energy shares, but not good for the rest of the market given the impact on profit margins and consumer demand. It has also come at a time when the global economic recovery is fragile. And like a year ago global shares are a bit vulnerable to a correction after a strong rally and higher oil prices risk being a trigger.

Our base case is that the oil price will settle around $US115 for West Texas Intermediate or $US125-130 for Brent and if so it wouldn’t be a major problem for the global economy and hence share markets. Obviously the risk would rise if the situation regarding Iran escalates. So keep an eye on oil prices.

The post Oliver’s Insights: will the world slip up on oil again? appeared first on AdviserVoice.

• 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.

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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.

The post Rising oil prices – what is the tipping point for growth? appeared first on AdviserVoice.

Russell Investments is expecting a slow motion market recovery, according to its March 2011 market commentary. Andrew Pease, chief investment strategist, tells investors to be optimistic but not too optimistic:

• Russell is moderately bullish on global equities, expecting returns to be in the high single to low double digit range. This is below some analyst predictions of 20%, but Pease urges investors to learn lessons from the past. “Only last August everyone was concerned about a potential double dip, but they’ve been quick to upgrade their forecasts for share market returns. Just as they were too pessimistic then, investors should be optimistic but not too optimistic now,” he said.
• The motto for Australian equities in 2010 was “less pain means less gain” and this proved true with the ASX 200 eking out a 2% return compared to 13% for the MSCI world index. Russell is slightly less cautious this year, pointing out it would be difficult to argue for a second year of underperformance compared to the rest of the world. But Australian equities will still face headwinds of the high Australian dollar, sluggish economy outside of mining and the potential for more RBA tightening.
• There is going to be continuing market volatility particularly with geopolitical tensions in the Middle East and North Africa. Pease reminds investors Europe could still be in for some flare-ups due to many European policy makers having a reactive rather than proactive policy.
• Rising oil prices could cap Russell’s forecast at the lower end of the range, but Pease says oil would have to sit over $130 per barrel for a sustained period before he revised his forecast.

Click here to download this document (pdf)

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Australian-owned sector ETF provider, Australian Index Investments (Aii), believes that with the growth in energy costs worldwide that it might be time for investors to tilt their portfolios towards this growth sector. With a basic underlying energy shortage, rising global demand and revolution in the Middle East, triple digit oil prices are very possible.

“With oil prices on the rise maybe now is the time to consider a higher energy stock exposure for portfolios. An easy and cheap way to implement an energy strategy is via the Aii Energy ETF, which is listed on the ASX.

“The Aii Energy ETF contains oil majors such as Woodside Petroleum, Origin Energy, Santos and Oil Search.  The basket of energy stocks in the sector is currently 22. Interestingly, the sector ETF does not just include oil producers but also offers exposure to explorers and service companies supplying the energy industry,” said Annmaree Varelas, CEO, Australian Index Investments.

The post Time to go Overweight on Energy Stocks – Without Having to Pick Winners appeared first on AdviserVoice.

• A host of economic figures have been released over the past week including the latest national accounts data – the most comprehensive assessment of the Australian economy. So what shape are we really in?
• Economists have been known to put some “spin” on the figures, influenced by their long-held views on variables like interest rates and exchange rates. We don’t have such pre-dispositions – we are more interested in the facts, and more importantly the implications for investors.
• Overall, it’s clear that the Australian economy is in good, but not great shape. The outlook is encouraging with unemployment and inflation at low levels, and China buying up our resources. But the outlook is not without its risks – high oil prices, Middle East contagion (remember the Asian contagion in 1997?), European debt, rising global inflation and a China bust.

Click here to download this document (pdf)

The post The Aussie Economy – The Big Picture appeared first on AdviserVoice.

• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 2.9 cents per litre to 139.2 cents a litre in the week to March 6 – a near 29 month high. Over the past three weeks the national average price has lifted by 4.4 cents per litre.
• Motorists are likely to see a further increase in petrol prices over the coming weeks. While the Singapore unleaded price has lifted by more than US$15 a barrel in the past three weeks, it has only partially filtered through to the terminal gate (wholesale) price – which gained 6 cents a litre in the last three weeks. CommSec expects pump prices to rise by a further 4 cents a litre in the next fortnight.
• Job market looks set to tighten further. The Advantage internet job index rose by 6.1 per cent in February. The ANZ job ads index rose by a 1.2 per cent in February after an upwardly revised 3.0 per cent rise in the prior month.
• The construction sector is still contracting despite a modest improvement. The Performance of Construction index rose by 4.4 points to 44.6 in February.

What does it all mean?

• At present petrol prices are going only one way – up. Petrol prices have surged by almost 3 cents a litre in the past week and are holding near 29-month highs and unfortunately for motorists it is unlikely to get any better over the next couple of weeks.
• The political instability in the Middle East and North Africa is the key driver of near term prices. And given the current tensions in the Middle East, the Singapore unleaded price has surged by over US$15 a barrel in the past three weeks and is holding at 30-month highs. Unfortunately for motorists the Australian dollar can only do so much, and as such most of the increase in the global oil price will need to filter through to domestic pump prices.
• The terminal gate price (wholesale) is certainly responding, lifting a sizeable six cents a litre since bottoming out three weeks ago. CommSec expects prices to increase by 4 cents a litre in the next fortnight, taking the national average price to around $1.44 a litre. At the high point of the discounting cycle petrol will be trading well above $1.50 a litre.
• The labour market has been the shining indicator over the past year and the latest job ads data suggests that employment growth is likely to be healthy in coming months. The Advantage job index has once again tracked higher after a bout of recent weakness, while the ANZ job ads series has once again shown moderate growth. Importantly while the labour market is likely to strengthen in coming months it is unlikely to see robust growth akin to 2010 – especially given that the domestic economy has lost momentum in recent months.
• The labour market will be one of the key hot issues that the Reserve Bank will be focusing on in coming months. As long as the supply of labour remains adequate, the Reserve Bank can remain on the interest rate sidelines.

What do the figures show?

Petrol prices:

• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 2.9 cents a litre to 139.2 cents a litre in the week to March 6. The metropolitan price rose by 3.0 c/l to 139.1 c/l, while the regional average price rose by 2.7 c/l to 139.3 c/l.
• Average petrol prices across states over the past week were: Sydney (up 2.1 cents to 138.7 c/l), Melbourne (up 3.5 cents to 138.7 c/l), Brisbane (up 3.0 cents to 140.7 c/l), Adelaide (up 4.8 cents to 139.5 c/l), Perth (up 3.2 cents to 138.8 c/l), Darwin (up 4.1 cents to 143.1 c/l), Canberra (up 0.3 cents to 134.0 c/l) and Hobart (up 3.1 cents to 144.1 c/l).
• Today, the national average wholesale (terminal gate) stands at a near 29-month high of 133.7 cents a litre, up 3.7 cents a litre over the past week.
• Last week, the key Singapore unleaded petrol price rose by US$4.83 (4.1 per cent) to US$123.60 a barrel – a 30 month high. And in Australian dollar terms the Singapore gasoline price rose by $4.68 (4.0 per cent) over the week to $121.88 a barrel.

Performance of Construction:

• The Performance of Construction index rose by 4.4 points to 44.6 in February. Any reading below 50.0 indicates the sector is contracting. Houses, apartments, and commercial construction were all below 50, while the engineering sector expanded after contracting in the prior month.

Job advertisements:

• The Advantage internet job index rose by 6.1 per cent in February. Job ads were strongest in the ACT (up 15.3 per cent) followed by Queensland (up 8.3 per cent), NSW (up 6.4 per cent), Western Australia (up 6.1 per cent), Victoria (up 4.9 per cent), South Australia (up 4.4 per cent), and Tasmania (up 1.5 per cent). Across sectors, gains were recorded for Transport (12.8 per cent), Administration, clerical and office support (11.4per cent) and trade services (10.3 per cent). Declines were recorded only in education (-0.8 per cent).
• Similarly the combined number of internet and newspaper job advertisements, as tracked by ANZ, rose by 1.2 per cent in February after a upwardly revised 3.0 per cent increase in January. Internet job ads rose by 1.0 per cent in the month, while newspaper job ads rose by 4.4 per cent. In annual terms job ads are up 19.3 per cent.

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 Job Advertisements release is a leading employment indicator. Employers only seek additional staff if business activity is strong, and more importantly, if they expect that conditions will remain favourable in coming months. It takes around 5-6 months for the new staff to be added to the payrolls. But a fall in job advertisements would have a more immediate impact on monthly employment estimates.
• The monthly Performance of Construction Index is a gauge of operation conditions across residential, commercial and engineering construction. The PCI is useful not just in showing how the construction 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 lift in the price of petrol is further bad news for motorists, taking precious spending dollars out of consumer pockets. Retailers already have to contend with the effects of the weather on seasonal spending, consumer conservatism and higher utility prices.
• Filling up the car with petrol is the single biggest outlay that Aussie households make each week so changes in petrol prices have a big impact on the budget and spending patterns. The average household is paying almost an additional $30 a month more on petrol compared with just over six months ago.

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The recent geo-political tension in the Middle East and Northern Africa has again highlighted the sensitivity of crude oil prices to supply threats, with WTI crude oil climbing close to $100 per barrel recently.

There is speculation as to how high it can go and so far analysts have capped the price rise to a maximum of $140-$150 a barrel. However Ben Le Brun, market analyst at CMC Markets, says it could react more aggressively if there is an actual supply disruption as opposed to a threatened disruption. At this stage OPEC has kept the world well supplied and does have the ability to pick up any slack but things could soon change as the region is responsible for supplying 36 percent of the world’s oil, Mr Le Brun says. He has conducted a 20 year analysis which shows it is not usual for oil prices to double during times of crisis: But traders should use caution if trying to profit as the price can swing about wildly and unpredictably in times of crisis.

• During the Yom Kippur War the price of crude oil went from $3.00 per barrel in 1972 to $12.00 by the end of 1974. The Yom Kippur War sparked an oil export embargo by several countries and resulted in a loss of 7 percent of the free world oil production. This oil embargo made prices extremely sensitive, increasing 400 percent in six months. In today’s terms that would be equivalent to the WTI oil price hitting $360 a barrel
• The Iranian revolution and the Iraq-Iran War again highlighted the rise in price caused by actual as opposed to threatened supply disruptions. Crude oil prices more than doubled, increasing from $14 in 1978 to $35 per barrel in 1981.
• The price of oil again spiked in 1990 when the onset of the Gulf War and its proximity to the world’s largest producer, Saudi Arabia, put oil production in jeopardy. The price went from $21 in July 1990 to $46 by mid October. This spike was much less than some had anticipated but the price did double with fears.
• After September 11 2001 and the outbreak of the Afghanistan war the price of oil was initially sold off. It was not until the start of the Iraq War II in 2003 that OPEC had to ramp up production of oil to keep the supply chain going. Prices actually went down at the outset of the Iraq war with most traders predicting a swift end to the conflict but by late 2003 the oil price began to rise as insurgent activity began to affect the oil supply. Prices hovered around $30 when OPEC cut production and in 2004 hit $40 a barrel. OPEC subsequently raised production but terrorists targeted oil supply and later in the year oil touched $50.

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