Why petrol prices got slammed into reverse

Oil prices have dropped more than 20 per cent in just six weeks. Photo / 123RF

After rising dramatically through most of this year, oil prices have crashed into "bear market" territory - dropping more than 20 per cent in just six weeks.

It has been a remarkable turnaround, erasing the entire year's worth of rises and offering relief for drivers who are this weekend enjoying a petrol pump price war.

It also looks likely to change economic forecasts for the New Year – although the Reserve Bank made a point of looking through the oil spike in its latest Monetary Policy Statement, limiting any impact on the outlook for interest rates.

In the run-up to the big slump - which started on October 2 - New Zealanders had been feeling the squeeze, hit by a triple whammy of rising oil prices, a falling kiwi dollar and new fuel taxes, including the Auckland regional tax.

The rising costs were hitting business and consumer confidence, adding to the risk of slowing GDP growth.

"There's two side to it," said Westpac chief economist Dominick Stephens. "The kiwi dollar has jumped unexpectedly [above US$68c] and the oil prices have dropped for a range of reasons."

Stephens had been picking prices to fall as the outlook for global growth slowed in the New Year.

Last week, New York oil futures plunged 7.1 per cent in one session - the biggest single-day drop in three years.

Across the world, analysts have had to recalibrate their outlooks, moving from fears that oil might hit US$100 a barrel, to the possibility that it may fall back below US$50.

Benchmark West Texas Crude is now trading at US66.70, down from a peak of US$84.98 on October 1.

"We never thought those prices above US$80 were going to last because it creates a supply response and that shale oil coming through from the US," Stephens said.

But the sell-off had been sharper than predicted and was probably sparked by the equity market fall in October - although a range of geo-political factors were also at play.

Opec released a grim outlook for next year's demand, just as American supply and reserves spiked.

Talking to the Bloomberg news agency last week, CitiGroup head of commodities Ed Morse described the volatility as very much an American story.

The State Department's mixed messages about sanctions on Iran, President Donald Trump's tweets about Opec supply and the explosion of shale oil production were all key factors, he said.

The ongoing trade war and the concerns it was creating about global growth next year also figured.

Meanwhile, for New Zealanders the oil slump has coincided with a return to favour for the kiwi dollar - boosting NZ purchasing power on the oil market.

Strong employment numbers and a subtle shift in language by the Reserve Bank were enough to shift global currency traders' attitude to the kiwi, which has risen more than US4c since October 8. It was trading at US68.4c on Friday afternoon.

The slump would change the equations for local economic forecasts, Stephens,said.

"It really affects your near-term CPI forecast," he said. "We thought we'd be reaching 2.3 per cent and we've revised that down to more like 2.2 per cent."

Petrol represented a very immediate cost to consumers and business.

So although it wasn't a huge component of the overall consumers price index (CPI), it had a powerful effect on both consumer and business sentiment.

"A big chunk of the negative sentiment has really been about rising costs. As far as businesses are concerned, the wage cost concerns haven't gone away. But for farmers and businesses, petrol prices coming down will ease the pain."

The timing will also provide some relief for households as we head into Christmas and the summer driving season.