Do you know that rising oil prices are now officially ‘good’ for Australia, which means the current 20% slide must be bad? We don’t mean at the petrol pump where the reverse is true but in the country’s terms of trade and current account.
Buried in the Reserve Bank’s most recent Statement on Monetary Policy the bank revealed that Australia could not be considered a low-level aspirant to OPEC.
“As a result of increased LNG and condensate production and related exports, Australia now earns more income from oil-related exports than it spends on oil-related imports.
“This means that an increase in oil prices will now boost the terms of trade, whereas in previous years an increase in oil prices would have weighed on the terms of trade,“ the central bank explains. That is an outcome that no forecaster saw coming.
Global oil prices (as measured by the two key futures prices for Brent (global) – and West Texas Intermediate (US) crude have weakened noticeably in the past month.
West Texas crude has fallen 20% since its peak five weeks ago, Brent crude is down by around 19% in the same time (also from its most recent peak above $US85 a barrel on October 3. That fall will be a negative (though it will be offset to a degree by the lower value of the Australian dollar)
The RBA alluded to the improvement in the terms of trade in its monetary policy statement in a way that reveals it has been taken by surprise by the recent rise in some commodity prices (iron ore, coal, LNG).
“Australia’s terms of trade have been revised higher relative to the August Statement. Higher export prices look to have offset higher import prices over recent months, and the forecast for coal prices has increased in light of ongoing strong global demand.
“The terms of trade are expected to remain around these higher levels for the next few quarters or so before gradually declining; Chinese demand for bulk commodities is still expected to moderate over time and global supply from low-cost producers is still expected to increase. The terms of trade are expected to remain above their trough in early 2016.
“Coal prices continue to present an upside risk to the terms of trade. Demand for premium thermal coal remains strong and growth in global supply has been limited. Coking coal prices have been affected by recent supply disruptions, and continue to be supported by ongoing strength in steel production.
“Despite ongoing uncertainty about the outlook for steel demand in China, the outlook for steel production in India is positive and coking coal exports to India have increased strongly over the past year.”
