Collapsing Oil Prices

The actions of Governments around the world to guarantee or recapitalise banks is starting to bring some stability to the financial sector, but markets are now expecting a worldwide economic slowdown and with it a dramatic decline in demand for oil. This has led to a collapse in the US dollar price of oil and, despite large falls in the value of the Australian dollar, even in Australian dollars oil has reached its lowest level this year.

Brent Crude Oil Prices*

On last night’s ABC news report, financial journalist Alan Kohler showed a chart of oil prices and petrol prices and questioned whether motorists were seeing price falls coming through to the bowser. This prompted me to revisit the regression model I have used in a number of previous posts. As I suspected, retail petrol prices as reported by the Australian Automobile Association (AAA) continue to track wholesale prices closely. While the AAA only publishes a monthly timeseries, they do publish a price each day supplied from FUELtrac, so I have also added a red dot on the chart showing today’s FUELtrac price. Contrary to Kohler’s conclusions, it is clear that petrol prices are falling in line with wholesale prices (in Sydney at least) and, subject to the fortunes of our dollar, it looks as though prices will be back below $1.30 per litre before long.

Sydney Petrol Price Regression Model*

*Data source: Australian Automobile Association, Bloomberg.

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