What is Driving Petrol Prices to Soar and When will it Ease?

One thing that frustrates motorists more than anything else is the price of petrol. Depending on the price, one day, you feel like you get an early Christmas present, and the next, you feel like you need to take out a loan to fill your tank. So, what is it with the roller coaster ride on petrol pricing?  

Depending on where you live, the pressure at the pump may be off for now, or you may be near empty, hoping it comes down. Either way, you’d be wise to understand the factors that drive the price of this commodity, given it is essential to our daily lives. 

What factors influence the price of oil?

With fighting in the Middle East and Ukraine, labour shortages and inflation, you would think that oil prices would be skyrocketing. While there are many components to this, let’s keep things simple. We know that Saudi Arabia, Russia, Canada, Iraq and the United States are the top 5 oil exporters globally, with three of these countries being members of the Organization of the Petroleum Exporting Countries (OPEC).

OPEC, or ‘the posse’ as some call it, determines the price of oil by increasing or decreasing supply. In June, OPEC announced they would extend their crude oil production cuts throughout 2024 to ‘stabilise’ the oil price. Limiting supply has an inflationary effect on the oil price, which helps member countries maintain favourable revenue levels. While this sounds like a cartel, there are laws stopping businesses from colluding to control prices, but countries seem to do what they like.

On the other side of the equation, we have demand. China, one of the world’s biggest consumers, is seeing a slowdown in its economy and has recently reported a fall of 6.4 per cent in its exports but a rise in its imports of 3 per cent. On top of this, Reuters reported that China has benefitted from buying cheap oil from sanctioned countries such as Venezuela and Iran. There’s also been a lot of doubt about the outlook for oil as we move onto greener pastures with eco-friendly energy solutions, and some questions have been posed about the current oversupply.

I don’t believe we will ever be fully rid of oil as it’s needed for various production purposes, including EVs, but the good news is that we will see a downtrend in price continuing for quite some time. From a technical perspective, if we look at the spot price of oil (CLSpot), it is trading at a critical level, and if it falls below this level, it could signal a further drop of 14 per cent to around $63 USD, which means, we might all have a good Christmas!

What were the best and worst-performing sectors last week?

The best-performing sectors included Healthcare, up 3.09 per cent, followed by Consumer Discretionary, up 1.63 per cent and Communication Services, up 1.34 per cent. The worst-performing sectors included Energy, down 4.26 per cent, followed by Information Technology, down 1.81 per cent and Materials, down 0.74 per cent.

The best-performing stocks in the ASX top 100 included James Hardie Industries, up 10.97 per cent, Ramsay Healthcare, up 6.37 per cent and Virgin Money, up 5.65 per cent. The worst-performing stocks included Xero, down 11.01 per cent, followed by Alumina, down 9.38 per cent and IGO, down 7.43 per cent.

What's next for the Australian stock market?

The way the All-Ordinaries index unfolded last week vindicated why I was cautious about getting too excited about the prior week's strong rise. After rising into Thursday, the market fell on Friday to close just one point above where it started the week. Given this, I suspect we may see further downside to below 6,800 points and possibly lower over the next month.

As it stands, we still can’t confirm the down move is over and that the market is once again bullish. For that to occur, we need to see the market rise over the coming weeks rather than fall, which is unlikely at this point.

Last week, I mentioned that we need to assume that because the market is technically bearish, it will continue until it proves otherwise. This is still my thinking and will remain so unless something dramatically happens to change my mind. Given this, it is wise to protect your portfolio, use stop losses and be ready to sell if your stocks fall away.

For now, good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.