By Michael Roddan, 27 July 2015

Australian motorists have been gifted with the cheapest petrol in two months, and prices look likely to continue their downward trend, but Wednesday’s US Federal Reserve meeting could complicate matters.

Cheap global energy prices may induce a more cautious approach to the US Federal Reserve’s interest rate hikes, if it dampens inflation and consumer prices, according to Deutsche Bank, which could then spell the end for cheap oil

The average price for petrol at an Australian pump has fallen by around 6c-a-litre over the past three weeks to a two-month low, thanks to a drop in global oil prices amid anticipated increases in supply.

According to the Australian Institute of Petroleum, the national average Australian price of petrol fell by 1.8 cents per litre to 137.1 cents per litre in the week to July 26.

“It’s been a great three weeks for motorists,” CommSec economist Savanth Sebastian said, adding that the slide in global prices should add more downward pressure to the cost of petrol at the pump in coming weeks.

West Texas Intermediate posted its sixth consecutive weekly loss last week, moving below the $US50 a barrel level, while the Singapore gasoline price fell 3.5 per cent last week to a 15-week low of $US73.50 a barrel, as an increase in US operational oil rig numbers compound concerns over Iran’s incoming supply.

The Iranian nuclear deal reached with the West may flood the market with cheap supply of oil, after economic sanctions are lifted on the nation’s oil exports.

Deutsche Bank strategist Michael Lewis said there is the possibility that further declines in the oil price could help to delay the Fed’s interest rate tightening, given the dampening effects lower energy prices would have on domestic inflation.

Mr Lewis said further weakening in the oil price could even support the safe-haven gold price — which recently crashed to a five-and-a-half year low last week.

“The falling oil price offers a potential life-line to gold if it helps moderate inflation expectations in the US and scale back Fed tightening expectation,” Mr Lewis said.

IG market strategist Evan Lucas said expectations for oil prices are now “lower for longer”, as production ramps up in the back half of 2015 and new oil and gas projects come online in the US, Australia and Asia.

But if the US Federal Reserve flagged a more cautious approach to raising rates amid current market and economic conditions at its FOMC meeting on Wednesday, Mr Lucas said,  the US dollar would weaken, causing an increase in global oil prices.

While 85 per cent of economists surveyed expect US Fed chair Janet Yellen to start lifting interest rates in September, financial markets are only pricing in a 45 per cent chance of a 10 basis point move at the meeting.

Extracted in full from the Business Spectator.