As petrol prices push above $1.50 a litre and energy stocks like Woodside and BHP drive the ASX near its post-GFC peaks, Australians have time to reflect on the pros and cons of crude oil’s massive rally.

The global Brent crude benchmark has climbed nearly 20 per cent in 2018, extending the gains over the past 12 months to over 50 per cent. Notably, a barrel of the black gold on this measure last week pushed past $US80 for the first time since November 2014 (it last fetched $US79.15). Some analysts now see it potentially reaching $US100 in 2019.

Higher oil prices are bad news for motorists. National unleaded petrol prices have been following the crude market, climbing around $20 a litre over the past 12 months to last week average $144, according to the Australian Institute of Petroleum. Many motorists are more likely seeing prices above $150 a litre, a quick trip to reveals.

The Singapore price of unleaded petrol is the key petrol benchmark for Australia. Last week Singapore gasoline prices surged to a fresh 3½-year high of US$91.70 a barrel, on CommSec numbers. Given a typical lag, that “points to higher pump prices in Australia in coming weeks,” the broker says.

The weekly petrol bill for a typical Australian household putting 35 litres into the car is already up $8 over the past year to approaching $50, and is up $13 since its 2016 low, AMP Capital data shows. “That will further constrain consumer spending power,” chief economist Shane Oliver notes.

‘Bad inflation’

The RBA and economists are all dead keen on seeing some inflation back into the economy, but oil-linked price rises may come under the heading of “bad inflation”.

More expensive petrol prices translate to higher costs for a range of businesses – not least the likes of farmers and airline companies such as Qantas, which burn through a lot of fuel.

Higher oil price forecasts have prompted Bank of America-Merrill Lynch economists to “nudge” up their 2019 annual inflation forecasts to 2.5 per cent from 2.4 per cent. It’s only a small upgrade because “the heightened competitive retail environment” means retailers will struggle to pass on higher energy costs, the economists say.

This won’t do wonders for profit margins. Where higher oil prices have been doing wonders is on the ASX.

Since this time in 2016 the listed oil and gas producers, as a group, are up a massive 68 per cent. More recently, energy stocks have offset the drag of heavy hitters such as the big banks, AMP and Telstra and helped the top 200 index climb within a whisker of its post-GFC highs.

Cheering prices on

So while motorists would be grumbling, it’s clear shareholders in the likes of Woodside Petroleum or BHP would be cheering oil prices on.

Also positive: Australia is rapidly expanding exporter of liquefied natural gas, the contracts for which are linked to the oil market. If higher prices do indeed persist into next year, that will boost our national terms of trade, Bank of America-Merril Lynch economists say: “We now see the current account deficit diminishing to 1.4 per cent of GDP in 2019”, from 1.9 per cent previously.

But can it all last?

The latest surge in oil prices has been remarkable, with six straight weeks of gains thanks to supply disruptions in countries such as Iran and, more recently, Venezuela.

These disruptions have exacerbated the Saudi Arabia-led drive by OPEC countries since early 2017 to reduce production and buoy prices.

The talk last year was that the entrance of the fast-moving US shale oil industry would be enough to keep prices with the $US55-60 a barrel mark.

But, at least so far, American production has not responded as quickly as expected, with some infrastructure bottlenecks across the Permian basin, home to a large portion of the shale oil industry.

Forecasts raised

The Citi team have raised their base case average oil price forecasts for 2018 by “a material” $US10 a barrel to $US75, “with prices now expected to trend higher” through this year.

The BAML analysts now expect prices to average $US70 a barrel through this year, and $US75 through the next. They see prices hitting $US90 in the second quarter of next year with “a risk” of crude hitting $US100 in 2019.

“Looking into the next 18 months, we expect global oil supply and demand balances to tighten driven by the ongoing collapse in Venezuelan output,” the BAML oil analysts write.

They also see the risk of further falls in Iranian crude exports.

Whether that is good or bad news depends on who you talk to.

Extracted from Financial Review.