[CommSec Research]Price war: Petrol selling below cost price

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Price war: Petrol selling below cost price

Weekly Petrol Price

¾ According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol fell by 0.2 cents per litre to 143.0 cents a litre in the week to March 27.

¾ Adelaide’s petrol price war has entered a second week with petrol selling at or below the wholesale price. The average Adelaide petrol price was $1.35 a litre modestly below the wholesale (terminal gate) price. In contrast the average unleaded price in Canberra neared $1.50 a litre.

¾ The Australian dollar cntinues to be a boon for motorists. Had the Aussie remained around 83 cents – where it was around ten months ago- motorists would be paying an additional 28 – 30 cents a litre for fuel.

¾ The Aussie remains well above USD102 cents and if it is able to hold around current levels pump prices should ease by around 2 cents a litre in a fortnight’s time.

What does it all mean?

· After rising for five consecutive week’s petrol prices have finally topped out, with the national average petrol price easing in the last week. However cheaper fuel prices was not the norm across all capital cities with Perth, Hobart and Darwin actually recording a price increase. Hobart prices are now the highest across major cities with the average price holding just shy of $1.50 a litre.

· Interestingly motorists in Adelaide are reaping the benefits of a petrol price war that started a fortnight ago – and was largely driven by a breakdown of the weekly discounting cycle. Over the past two weeks Adelaide motorists have been in a happy position of being able to buy petrol at effectively below the cost price. The wholesale (terminal gate) price has held near $1.35 a litre, but motorists have been generally able to purchase fuel for around $1.30 - $1.35 a litre and even cheaper when discount vouchers are used.

· We can only speculate about the reasons for the cheaper fuel, but it would seem that intense competition is a key driver behind the petrol price war. While at present it is only taking place in Adelaide the petrol price cycle has also been disrupted in other capital cities on several occasions over the past year, so there is a risk that the petrol price war could spread, especially to cities like Melbourne, Brisbane and Sydney that have recognised weekly discounting cycles.

· The strength of the Australian dollar has also been a boon for motorists over the past year, curbing the impact of higher global oil prices on domestic pump prices. And given the surge in the Aussie over the last couple of days it is likely to play an even more important role in near term, insulating the domestic economy from higher global prices. Interestingly the Singapore unleaded price recorded a modest increase in US dollar terms over the past week, however in Australian dollar terms the Singapore unleaded price has slumped by almost $2.60 a barrel – a result that should filter through to motorists in a fortnights time. CommSec expects pump prices to ease by around 2 cents a litre in the next fortnight.

What do the figures show?

Petrol prices:

· According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol fell by 0.2 cents a litre to 143.0 cents a litre in the week to March 28. The metropolitan price fell by 0.6 c/l to 142.3 c/l, while the regional average price rose by 0.7 c/l to 144.5 c/l.

· Average petrol prices across states over the past week were: Sydney (down 1.0 cents to 142.5 c/l), Melbourne (down 1.2 cents to 141.2 c/l), Brisbane (down 0.5 cents to 145.4 c/l), Adelaide (down 0.2 cents to 134.8 c/l), Perth (up 0.3 cents to 143.3 c/l), Darwin (up 0.7 cents to 147.0 c/l), Canberra (down 1.4 cents to 147.2 c/l) and Hobart (up 3.7 cents to 149.8 c/l)

· The national average wholesale (terminal gate) has risen to a fresh 29-month high of 135.7 cents a litre today, risen by 1.3 cents a litre over the past week.

· Last week, the key Singapore unleaded petrol price rose by US$0.70 (0.6 per cent) to US$122.60 a barrel. However in Australian dollar terms the Singapore gasoline price fell by $2.57 (2.10 per cent) over the week to $120.11 a barrel.

What is the importance of the economic data?

· Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum. National average retail prices are calculated as the weighted average of each State/Territory's metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions.

What are the implications for interest rates and investors?

· For Adelaide motorists, the petrol price war is clearly good news in the short-term. But if competition is reduced as a consequence then it could potentially lead to higher prices in the future. For independent operators, an on-going price war is a key risk to viability. For investors, the petrol price machinations have implications for listed companies like Caltex, Wesfarmers (Coles) and Woolworths in terms of sales, margins and profitability.

· The political instability in the Middle East and North Africa is the key driver of near term prices. And with pump prices holding near 29-month highs, the current conservative behaviour of consumers is likely to remain part of the economic landscape in the near term. Our equity analysts are maintaining HOLD recommendations for both Woolworths and Wesfarmers.