Oil price slump to ease pain at pump

Downturn fears pull crude lower but dip not expected to last

Global oil prices slumped 10 per cent last night, which could be good news for motorists in the next few weeks.

The downside is that fear of a global recession is driving the fall.

Fears of a serious economic downturn have taken hold of markets pushing down most commodity prices.

West Texas Crude dipped below US$100 ($162) a barrel for the first time in two months. Brent Crude — which more directly affects Kiwi petrol prices — dropped to US$102 per barrel — almost 20 per cent down on recent peaks above US$120.

That will likely mean some relief at the petrol pump for Kiwi drivers across the next couple of weeks but experts warn the longer-term trend is still ominous.

The odds remain against a significant fall in petrol prices over the longer term while the industry still has serious supply-side problems — such as the war between Russia and Ukraine.

Oil markets are locked in a highly volatile battle between demand and supply pressures.

Fears of a global recession have risen as central banks around the world have lifted interest rates to get on top of inflation.

An economic downturn would reduce demand for oil and that’s put downward pressure on the price in the past few weeks.

But the trend may not last. Unfortunately, despite this latest slump, it still looked more like prices would stay elevated for the next year, said AA fuel analyst Terry Collins.

The issue was supply — or the lack of it, he said.

With the war still raging in Ukraine, restricting supply from Russia, and a lack of new supply coming on from the US and the Middle East, it was hard to see a significant sustained fall in the near term, Collins said.

“Until Christmas, we’ll see a lot more volatility,” Collins said. “I expect we’ll see a little movement with prices tracking up further.”

There were still big risks around energy supply in Europe and doubts about the ability of Saudi Arabia to meet the increased supply targets they have planned.

Meanwhile, even the demand picture is uncertain.

The continued bounce back from Covid and the onset of the Northern Hemisphere winter could strengthen demand.

Movements in oil commodity prices only have a marginal impact on retail petrol prices even though they set the overall trend.

Much of the price drivers pay for petrol is made up of taxes.

Usually just over half of the cost (52 per cent) is made up of taxes, including the fuel excise duty, the emission trading scheme levy and GST.

However until August at least the Government has reduced that with the temporary removal of fuel excise duties — to the tune of around 29c per litre of 91 octane.

About 40 per cent of the price is made up of production and shipping costs and around 10 per cent is tied to the wholesaler and retailer margin.

The value of the kiwi dollar also plays a part in the local price as imports are paid for in US dollars.

The kiwi has been trading at twoyear lows versus the US dollar which is also putting upward pressure on the local price.