So why is the retail price now so responsive to the global crude oil market? And will we see a repeat of 2014/2015’s weaker fuel prices?
It used to be said that retail fuel prices went up like a rocket, but down like a feather. It was thought consumers did not benefit quickly from crude price falls, as the integrated oil majors behaved as an oligopoly.
That, however, is a thing of the past. Thanks to the transformation of the sector’s ownership structure over the past decade, retail fuel marketing is now fiercely competitive.
Over the past 10 years, oil companies sold retail sites to dealers, but set up long-term supply arrangements for their fuels. This has had two main consequences: ownership in the retail fuels sector has fragmented, and retail pricing is now typically set by a local discounter. These discounters are either very low cost – operating automated petrol stations, for example, which simply sell fuels via credit card with no employees on site - or they have a business with a variety of revenue streams – such as hypermarkets, which see fuels retailing as a means to draw in customers to visit the main shop. This shift in how the sector operates has fixed retail fuel margins at a very low level, to the point where they now track ex-refinery gate prices and crude oil price developments.
In November 2014, crude prices were collapsing as OPEC was competing to maintain its global market share. The current crude oil environment is very different. For a start, oil demand is still growing and should exceed 100 million barrels per day before the end of this year.
Coupled with this, U.S. sanctions on Iranian crude purchases will come into full effect in early November, which will significantly curtail Iranian crude oil exports.
While U.S. tight oil supply has grown strongly, it will not make up for the loss of Iranian oil, as infrastructure constraints are choking faster supply growth from the Lower 48.
With the market expected to lose about 1 million barrels per day of Iranian supply, the fundamentals suggest pricing weakness in 2019, as supply growth outpaces demand growth.
That said, the market is looking closely at what happens once further Iranian volumes are taken out of the market and whether OPEC can make up for this loss. But this is tricky - OPEC faces a difficult task formulating an appropriate response in today’s dynamic and politically charged environment.
However, the probability of a U.S.$30 a barrel price drop is low. It is more likely that prices could spike – even to as much as U.S.$100 a barrel or more - if the U.S. adopts an aggressive stance towards buyers of Iranian crude once the full sanctions regime is in force.
For prices on the forecourt to drop, the cost of crude oil needs to weaken. This is something most likely to be triggered by a global recession. Fortunately, the chances of this are, at present, remote. So, in all likelihood, pump prices are likely to stay high for the near term.