KEY POINTS:
Oil prices went under $US54 a barrel yesterday to a 19-month low.
The drop is expected to further ease pressure on Reserve Bank Governor Alan Bollard to raise interest rates this month.
Economists are already expecting a fall in petrol prices at the end of last year to
ease inflationary pressure.
The price of crude oil has dropped more than 12 per cent since January 1.
News that Saudi Arabia would join Opec in cutting production did not slow a wave of selling caused by a build-up in US fuel stocks after a warmer than normal winter.
The ANZ's head of market economics, Cameron Bagrie, said the price drop was a "win win all round".
"It obviously eases a little bit of inflation pressure," he said.
But there was a risk the extra cash in peoples pockets could fuel increased retail spending.
Bagrie didn't believe the Reserve Bank would raise interest rates when it next considers them, on January 25, because of comparatively sluggish growth rate and the fall in headline inflation.
In a report issued yesterday, Westpac chief economist Brendan O'Donovan said the 15 per cent fall in local petrol prices between September and last month was likely to pull the annual inflation rate down from 3.5 per cent to 2.8 per cent.
That would be the first time inflation had been within the Reserve Bank's 1 to 3 per cent target in more than a year.
December quarter inflation figures will be given on Wednesday.
Citigroup economists held a similar view, saying the fall in petrol prices offset rising prices elsewhere.
But Citigroup expects Bollard to look past the drop in oil price and raise the official cash rate to 7.5 per cent
The apparent reason for the fall - unseasonably warm weather in the northeast United States reducing demand for heating oil - is hardly a long-term fundamental.
"There's plenty of winter still left," said Jeremy Batstone, head of research at US firm Charles Stanley.
Factors such as world economic growth, Middle East tension and Russia wielding its export clout should be leading to higher prices.
But there is evidence that investment funds are turning bearish on oil, shifting from long to short positions.
If the current trends continue, forecasts for the world this year of gradually slowing growth, benign if tighter interest rates and robust equity gains could change.
For central banks this could mean different things.
The European Central Bank, for example, seems to want at least one more interest rate increase. The US Federal Reserve is already on hold, and lower oil prices could dilute any temptation to impose another increase.
Investors, meanwhile, have almost universally started the year expecting equities to outperform bonds, and lower oil prices would do nothing to change this.
But most strategists have been basing their forecasts of modest stock markets gains on moderately slowing US and world growth.
Lower oil prices could push expectations far higher.
"For equities it would be positive," said Klaus Wiener, head of research at Generali Asset Managers in Cologne.
"It reduces the cost pressure and helps to widen margins for a lot of companies."
An exception would be the oil industry, which has been high-flying for years.
BP's 3 per cent-plus fall on Tuesday gave a taste of the impact.
Some analysts also believe cheaper oil will help the US dollar, which fell about 8.5 per cent last year against a basket of currencies.
That would ease pressure on the high-flying Kiwi dollar.
But ANZ's Bagrie points out that one of the reason petrol prices are down is that the New Zealand dollar has risen considerably over the last three to four months.
Should it come back down - which Bagrie said was a strong possibility - exporters "will certainly find that good news but for the poor old domestic consumer it means petrol prices will get a bit higher again".
