Coronavirus: Falling oil prices could be a tonic for motorists and industry alike

Tuesday, 21 April 2020

The price of West Texas oil futures has dropped below zero for the first time. However it's not the only price-setter for oil.

EXPLAINER: Unrefined petrol prices are tumbling to historic lows overseas, which should be fantastic news for motorists – when they're allowed to drive again.

However, the AA says they could be even lower if it were not for New Zealand's high petrol tax.

Overseas oil prices have plunged below zero because of a global surplus, made worse as the coronavirus pandemic shuts down factories and limits movement.

The price of West Texas Intermediate crude plunged to an historic low, minus-US$37.63 a barrel for its contracts in May. That effectively meant oil sellers were paying buyers to take the oil away because they did not have storage.

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Prices for 91 Octane petrol fell 26c between the start of March and a month later, according to Gaspy.

* Oil companies are disillusioned with New Zealand**

The glut has been worsened by a price war between Saudi Arabia and Russia, and Opec's recent pact to reduce oil production in response to Covid-19 has not been enough.

'The oil industry is currently experiencing a perfect storm of elevated supply, a lack of storage capacity, and at the same time demand has just literally evaporated,' Kiwibank's chief economist Jarrod Kerr said.

'For years now, US shale producers have been getting more cost effective and have lifted the US to become the world's largest producer of crude and expanding world production capacity.

'However, the coronavirus and measures of social distancing employed around the world have destroyed demand.'

What does this mean for the consumer?

Some respite at the pump. According to petrol price app Gaspy, 91 petrol has dropped 26c from $2.13 a litre on March 3 to $1.87 on April 20, a far cry from the $2.17 a litre it was a year earlier.

Don Braid of Mainfreight says easing fuel prices will assist ''at a pretty tough time''.

Diesel has fallen 23c, from $1.42 a litre to $1.19 – regional variations not withstanding. Compare that to $1.56 at the same time last year.

Mark Stockdale, AA's petrol watch spokesman, says that while fuel prices are the lowest for several years, they are 'probably as good as it's going to get'.

Oil prices had following a fall in commodity prices during March and April, and had stayed put. But not all regions had benefited.

'The actual cost of petrol, the cost of importing petrol is now around 25 cents a litre, that's what it is costing companies to import petrol.

'Even with really low commodity prices, we are not doing super low prices at the pump. The reason for this is tax. We are paying $1.05 in tax and that is a lot higher then when we were last this low 10 years ago.

'It just goes to show that even with low commodity prices, you are not going to get low prices at the pump when we are paying so much in tax.'

A flame burns at a Shell oil refinery in Texas. Covid-19 has magnified the oil glut, with airlines grounded, factories closed and drivers off the road.

What could it mean for transport firms?

A cut in fuel costs when they desperately need it.

Because New Zealand is a net importer of oil, lower crude prices will help support the economy after the Covid-19 crisis.

Don Braid, chief executive of Mainfreight, says freight volumes have dropped significantly, with his company fielding a 40 per cent fall in sales in the first full week of lockdown.

'It's assisting in a pretty tough time. Does it make up for the tough time? Not at all, but it's welcomed by everybody, not just domestically but internationally, for sea freight and air freight.'

David Aitken of National Road Carriers said with freight companies taking just partial loads and often nothing on the way back, the fuel price drop was good news.

'Margins were pretty low before this lockdown, but there's a lot of freight that can't be moved … so it's probably costing them more to move freight right now, given they can't maximise their loading.'

Marsden Point in Whangarei is New Zealand's main source of refined fuel. It's under review as global oil margins begin to plummet.

What does it mean for the New Zealand oil industry?

Major fuel companies have been quiet since they came under scrutiny from the Government last year over price transparency.

But Z Energy, which also owns Caltex, saw demand under lockdown for 91 Octane tumble 80 per cent at its Z retail stations.

However, Z spokeswoman Victoria Crockford said there were several factors at in play in New Zealand fuel prices, and local competition was probably the most important now.

'The days of all service stations going up in accordance with crude and all prices going down in accordance with crude are gone.'

Another important factor is West Texas oil is not the only benchmark for oil prices.

Z's benchmark is Brent crude, which has also fallen mightily in price but remains at US$25.57 a barrel, largely because it involves fewer worries about storage.

'The negative futures observed in the WTI are about crude oil being 'stuck' in a landlocked part of the United States, with nowhere to send or store it during a time of low demand,' Crockford said.

'By comparison, Brent crude is largely moved by ships and is still able to be moved around and stored. So, while the WTI prices may be remarkable in terms of historic precedent, they have absolutely no relevance to New Zealand.'

Plunging oil prices do not directly affect Marsden Point and its owner, Refining NZ, which refines about 70 per cent of New Zealand's fuel.

But global refining margins do, and the company has signalled it's looking at other avenues, including being an importer rather than a refiner.

If New Zealand was to depend soley on imported oil, it could have major implications. The refinery was set up in the 1960s to ensure security of supply.

It could affect prices and supply for consumers, industries and the oil companies, which own 43 per cent of the refinery.

Refining NZ spokesman Greg McNeill said the company was looking closely at what it's worth, particularly its strategic fuel pipelines from Northland's Marsden Point to Auckland.

That could make a big difference to its ability to borrow, since the pipelines were steady income. That was an advantage 'when you have very low margins and then very high margins'.