22 March 2021

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Fuel Market Monitor: the calm after the storm?

Fuel prices fell in 2020, but will 2021 bring a price rise at the pumps? Paul Holland, Managing Director, Fleetcor UK, on what fleets should expect this year.

Last year, if I had been asked for my opinion on the price of oil in the UK, I would have something very different to say than I do today. The first lockdown was enforced in March 2020 and the world was coming to understand that we were entering a time completely unlike previous pandemics, such as SARS and Swine Flu.

The price per barrel had dropped significantly, hitting a low of $19.33 on the 21st April. This fall in oil prices was obviously good for consumers, particularly those who operate large fleets, but it wasn’t good for the economy overall, which was already reeling from the still-new COVID-19 pandemic. That was a storm, but a year later we seem to have found a moment of calm in which the price at the pump is neither unsustainably low nor overpriced. The price per barrel today stands at $66, sitting almost exactly in the middle of the price range we’ve witnessed over the last 25 years (which range from $17.68 in the year 2001 to $146.08 in 2008).

Why has oil bounced back?

Oil price is determined by how scarce the market believes oil to be and how much demand the market believes there is. Over the last year we saw China, a major importer of oil, hugely contract and then expand its demand. Their strict lockdown meant that consumers weren’t buying, flooding the market with excess fuel.  

When China got its COVID-19 problems under control, buyers were back in their cars and the price returned to its previous position. Then over the summer the US (both a major consumer and producer) was hit by an abnormally hot, wet summer and natural disasters in oil-producing areas that slowed down extraction. This raised prices further, offsetting the lowering of prices caused by general decreased demand across the world.

The benefits of a strong pound

In September of last year, it was predicted that the wholesale price of fuel in the UK would be around 87p per litre. Currently we have found that it is closer to 95p, showing that the market wasn’t expecting the significant increase in fuel prices that we have seen over the last few months. However, UK fuel consumers are still getting a relatively good deal at the pumps, which can be attributed to the unexpectedly strong pound versus the dollar.

Optimism about the COVID-19 vaccine and Brexit becoming normalised are the key to this. Since the UK was hit particularly hard by COVID-19, which coincided with the country leaving the European Union (EU), and now that the former is ending and the latter is becoming a fact of life the financial impact is ebbing away. Last year the pound was at an all-time low against the dollar at $1.16, today it is $1.40. Since fuel consumers are buying a commodity priced in dollars with a strong pound they can get more for less, lowering prices. Although the price decrease isn’t as dramatic, it adds up at the pump, especially when you are paying for fuel for a large fleet.

What can you expect to pay on the forecourt in 2021 – and why?

Without the pound being as strong as it is, fuel providers would be paying £1.02 per litre. How does that factor into what your fleet will be paying at the forecourt?

Fuel prices are made up of the wholesale cost of the fuel, the margin that the retailer adds to this (typically 8-10p per litre) and VAT, though businesses can typically claim this back. Retail margins and VAT are not likely to change, so the only thing that will affect what you pay for fuel will be the price of oil itself.

Currently, oil prices are predicted to remain stable, perhaps dropping a small amount. The recent budget could have raised fuel duty, but this was avoided and it remains frozen. So there are only  two factors that could cause the price you pay at the pump to rise: the pound weakening or oil prices surging.

Provided that things stay much as they are there does not seem to be any reason why the price at the pump won’t be stable for the foreseeable future.

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