Allstar Insights: Negative oil prices and what it really means
The fuel market is incredibly dynamic and extremely volatile
The dramatic fall in oil prices will impact on fuel costs and fleet operations, but not necessarily in ways you might expect.
Paul Holland, Managing Director for UK Fuel, Fleetcor UK, explains why the market is facing unprecedented volatility, further ramifications for UK businesses and what actions you should take.
In another of our Insight video series, he will look at how oil is traded and global politics that influence the sector, the impact of Covid-19 on supply and demand and likely fuel price scenarios for the next few months. Paul will also talk about actions for managing fuel costs and improving fleet efficiency during what is likely to be a turbulent six months for oil prices.
Why the price of oil has fallen so sharply…
At the start of the year the cost of a barrel of oil was around $70, while today it has fallen to just under $20. This is largely due to the impact of Covid-19, which has driven an unprecedented fall in demand across the globe.
A second component, up until the last ten days or so, has been a significant battle between two of the leading global producers of oil, Russia and Saudi Arabia, who have been trying to put more oil to market to maintain their own oil revenues. It’s a significant factor which came to a head about a week ago, with an agreement to cut production by about 10%.
Over the last 24 hours, there’s been a lot of talk about the notion of negative oil prices in the US. Suppliers have been having to pay to offload physical oil product. The reason for this is a technicality, which is driven by the fact that traders trade oil many times before it reaches its final destination, and because inventories are so high, the reality is there are very few places to put surplus stock
So to offload product which somebody has to take delivery of, people are actually paying them to take it rather than be stuck with oil they will have to stock themselves.
The impact on UK fuel costs…
For consumers and business, this has zero impact. Nobody is going to be paying you to draw fuel from a gas station. This is all about the upstream supply cycle and the various trading dimensions.
The reality is prices at the fuel pump will continue to fall for the foreseeable future as they catch up with the commodity cycle, but no one is going to pay you to take the product.
In the medium term…
Over the next few months, it’s difficult to see the cost of oil falling any lower than it is today. It might fall some, but the materiality at the pump level is going to be quite low. In fact, today, the traders are predicting that the pump price over the next six or eight months will increase by about 5-6 pence per litre. Clearly the market is incredibly dynamic and there lots of volatility.
Actions fleets can take…
This is very dependent on the profile of the fleet. The largest fleets and buyers of fuel are buying on indices linked directly to the commodity cost, so on a daily basis they’re tracking the market.
But when you are buying at the pumps, which many Allstar customers are, brand is significant, as the brands’ pricing strategies are very different.
Another critical component is control. What you can do is control the amount of fuel you use much easier than you can control the amount you pay. You’ll never negotiate a 10% reduction in fuel price, but you may be able to save 10% in the amount of fuel you use.
You can do that by a range of mechanisms. You can implement controls on drivers, have league tables, track consumption and benchmark them, and introduce velocities, so they can only fill up at certain time of the day or at certain frequencies, all of which will give you increased visibility of what people are doing. Through consolidated invoicing and reporting you can profile your fleet and then make decisions going forward.
The fuel market is always going to be volatile. There are significant downward trends at the moment, but that will change in the future. The best thing that you can do is stay close to the market and your fuel suppliers, and keep track of what is happening through insights such as these.