In this article we will look at the crude oil price forecast and its impact on fuel prices. In 2022, EIA expect an average of about $66/b for crude, but traders, believe that oil may break through $100/b, nearing the $120/b by the end of 2022, which paints a grim pictures for fuel-reliant businesses.
Price Composition of Distillate Fuels
The price that final users pay for petrol, diesel, jet fuel and, in general, distillate fuels is governed by the local wholesale fuel price. This are affected by:
- the global price of crude oil
- supply and demand for crude
- world refinery production and capacity
- currency exchange rate, as refined fuel is sold in USD
- distribution costs
- arbitrary gross margin retailers decide to introduce
- fuel duty charged by the local government (57.95p/l in the UK)
- VAT/GST/value added tax (20% in the UK)
While some of these stay largely static – such as the fuel duty rate and VAT – others such as the oil price and dollar to local currency exchange rate can be very volatile.
The chart above looks at the pump price of petrol and diesel (top), together with the underlying wholesale prices (bottom) for the United Kingdom.
The ‘Rocket & Feather’ Effect
This is the dynamic according to which fuel prices always appear to rise faster than they come down, i.e. they go up like a rocket but fall like a feather.
Whenever the price of crude (and, in turn, that of wholesale fuels) goes up, retailers see their margins eroded very quickly and therefore have to take immediate action to bring the pump prices up in order to preserve their bottom line.
When crude oil price comes down, however, retailers’ margin suddenly widens and stays higher for as long as they maintain the current pricing level.
This explains the general reluctance to fall back in line, in order to hold on to their earning as much as possible, before being driven down by the competition and the inevitable law of supply and demand.
How low can fuel prices go?
There is a limit to how low prices can go and this is the fuel tax, depending on each specific country.
Realistically, there is another 10% above the tax that accounts for distribution, from the oilfield to the pump (that is provided that retailers and oil majors give fuel away for free). In the UK, fuel duty is set at 57.95p/l, plus VAT on the total price make up for the vast majority of the price people pay.
When the price of oil is falling it can also create a perception that pump prices are not reducing as much as they should because the lower the pump prices falls, the greater the percentage of tax.
Look Ahead
Brent prices have risen over the past year as result of steady draws on global oil inventories, which averaged 1.8 million barrels per day (b/d) during the first half of 2021.
From August to October, crude oil price raised 45% and we expect prices to continue to climb during the fourth quarter of 2021.
In 2022, we expect that growth in production from OPEC+, US and other non-OPEC countries will slowly outpace the growth in global oil consumption and contribute to Brent prices declining to an annual average of about $66/b.
In the short term, however, fuel-reliant businesses such as haulers, airlines and costal shipping companies, are exposed to a significant risk, with the price of assets’ OPEX eating into their margin.
Despite the cautious optimism of the EIA, traders believe that the price of crude may break through $100/b, nearing the $120/b by the end of 2022.
In this scenario, however, we need to keep into account that the price of futures is also influenced by a certain “risk factor” (in other words, traders factor in the risk they are going to assume by agreeing to purchase at a specific price at a later date) as well as a certain “margin” they are expecting to make. While the two items may balance each-other out, the upper interval still paints a grim picture for consumers and energy-reliant businesses, which will be called to face uncertain times as we venture into an uncharted territory following the COVID pandemic.
Mitigating the Risk Ahead
Remember to look at the spot market whenever in need for fuels.
Blkcommodites.com is the online spot market, where you can find pre-vetted suppliers from around the world to purchase at be best possible prices, below the institutional markets.
The reason being BLK leverages its expertise in supply chain management and aggregate volume from multiple buyers all over the UK, Italy and the rest of Europe to negotiate ad hoc deals with suppliers, coming 4-5% below the Platts’ price for distillate fuels.
Take immediately advantage of our negotiated $20/ton discount on the Platts NWE FOB or contact us for any specific requirements (e.g. jet fuel, LPG, etc.).
Check-out our negotiated rates for diesel or get in touch and secure your business from fuel prices’ fluctuations leveraging the purchasing power of hundreds of players like you, already purchasing on Blkcommodities.com.