Liam Dann: Big oil slump must mean cheaper prices at the pump

Petrol prices remain higher in Whanganui than neighbouring provincial centres. Photo / 123rf

OPINION:

In the past 48 hours, the price of oil has slumped, despite a new price cap on Russian supply being introduced.

Brent Crude, the oil that makes up the bulk of New Zealand’s petrol price, has fallen 10 per cent to its lowest level since early January.

In fact, in the past month, the price has come off by almost 20 per cent.

Meanwhile, the kiwi dollar has strengthened by about 6 per cent in the past month.

That has to mean cheaper prices at the pump are on their way.

The falls are good news for motorists and also for those with a keen eye on broader inflation pressures.

Oil is one of the major costs running through the production of almost all the goods we buy and trade.

While inflation was already rising due to central bank stimulus, it was the oil shock that followed Russia’s invasion of Ukraine that really kicked it into the stratosphere.

The Brent Crude oil prices started rising at the start of the year, spiking as the invasion unfolded and reaching a peak of US$127 a barrel in March.

Since then the price has been volatile but has broadly trended down. The latest slump brings it back to pre-war prices.

Whether the lower prices hold is another matter.

There is still a great deal of risk with big geopolitical moves being made that have no certain outcomes.

The Financial Times has called the Russian price caps “one of the most forceful interventions in the global oil market ever”.

Starting last night, the EU banned seaborne oil imports from Russia.

It also joined the US, the UK, and the broader west in prohibiting their businesses from transporting Russian oil anywhere in the world, or providing services such as insurance, unless Moscow sells its oil below a price cap - currently agreed at US$60.

In theory, this should limit supply and push prices back up.

But it is not yet clear how much Russian oil the two sanctions measures could take off the global market.

Russia says it will simply redirect supplies to markets that don’t observe the cap.

So far Opec has not responded with any changes to its production. The oil producers group agreed in October to cut supply, which pushed prices back up - albeit briefly.

Ultimately, expectations of a global recession have proved the larger driver of oil prices in the past few weeks.

Fitch Ratings today revised down its world GDP forecasts for 2023, saying central banks had intensified their fight against inflation meaning interest rates go higher. It also said the outlook for China’s property market had deteriorated.

Fitch now expects world GDP to grow by 1.4 per cent in 2023, revised down from 1.7 per cent in the September 2022 outlook.

Fitch has lowered its forecast for US 2023 growth to 0.2 per cent, from 0.5 per cent, as the pace of monetary policy tightening increases.

Fitch also cut its China 2023 growth forecast to 4.1 per cent, from 4.5 per cent, as prospects for a recovery in housebuilding faded.

China’s problems with its Covid policy and lower economic growth have already suppressed demand for all commodities, including oil.

But if China’s economy were to bounce back more strongly than expected - or the US for that matter - oil could rise again.

Meanwhile, the strong monetary policy stance being taken by our Reserve Bank has boosted the value of the kiwi dollar relative to the US.

That makes imports, including petrol, relatively cheaper in local currency terms.

The kiwi has staged a major comeback in the past few months off a low of US55.62c in mid-October to trade close to US64c this week.

That’s still below highs close to US70c in March.

Regardless the equations for motorists now look more heartening and we should expect to see further falls at the petrol station in the coming days.