07 December 2021
The emergence of the Omicron COVID-19 variant has had an impact on the price of fuel, says Paul Holland, Managing Director for UK Fuel at Allstar.
The rapidly rising cost of fuel over the past few months illustrated that prices are often driven by perceived supply and demand – in this case that markets believed not enough was being produced to meet burgeoning requirements.
The perception was that, as a result, the general trajectory of prices would continue upward, if a little unsteadily, next year too. Then the news of the Omicron COVID-19 variant hit.
The first action many took in late November was to sell, as the spectre of reduced global demand loomed: in the US, the benchmark oil price index saw its biggest decline since April 2020.
So we’re back to a situation where markets are trying to predict future supply and demand in an unpredictable environment. At the time of writing in early December, the futures market is showing further, slight declines in price in the first quarter of next year.
But we’ve been here before, and making confident predictions is especially difficult at the moment.
When COVID-19 emerged in February 2020 it created a lot of nervousness around fuel prices. Fuel had already been produced, but there was a significant drop in demand, resulting in a bizarre moment in April where the price of a barrel of crude oil had dropped to negative $36 dollars as fuel traders paid others to take it off their hands.
Since then, it has risen again, surpassing the 2019 average of around $60, hitting more than $80 and, pre-Omicron, indications pointed to the price either levelling out or reaching earlier peaks of $100 to $110 per barrel. Yet by early December, prices were back to around the $70 mark.
Although the price you pay at the pump won’t reflect these drastic swings, the price of crude along with many other factors will directly affect the day-to-day cost of fuel.
Balancing supply and demand
Before the onset of Omicron, we had reached a situation that was the reverse of early 2020: too much demand and not enough supply. Of course, this may continue to be the case if this variant is found to be less severe, and lockdowns become a distant memory.
Employees have been returning to offices and most industries are back to near-full capacity, so demand is up. However, returning production to 2019 levels and shipping fuel is proving difficult, due to serious problems with the global supply chain.
The politics around fuel prices are complex too: oil-producing nations and organisations like OPEC don’t want to oversupply the market and cause the price to plummet again, especially if this new COVID variant pushes nations back into lockdowns.
But the petro-states need to walk a tightrope between releasing too much oil and the price dropping, or producing too little and the price rising to unsustainable levels, forcing a market correction.
The USA was considering releasing some of the strategic reserve, and OPEC has announced a rise in production from January. With perception so important, the figures they release need to be taken with a pinch of salt.
Moves of this type to influence the price might become common in the next few months, leading to some volatility, and in addition, demand at the pump is still a little depressed versus previous years, so companies that sell fuel need to maintain margins through a higher retail price per litre.
Another factor making prices hard to predict is the dollar-to-pound exchange rate. Crude oil is priced in dollars, so although the pound is currently strong, unforeseen events could weaken it, while a Bank of England rate hike (which analysts believe is likely) could have an effect too.
You also have to consider that a growing number of the UK’s - and the world’s - vehicles are electric, and an increasing amount of the world’s electricity is generated without the use of fossil fuels, which will decrease oil demand over time.
It may not be a smooth transition though, and this could have an effect on demand, and price too: earlier this year the UK’s offshore wind sector, which provides 7% of the country’s electricity, was hit by a period of calm in the North Sea, and as a result fossil fuel-powered plants had to be bought on line to pick up the slack.
Major price swings of the kind we saw in early 2020 seem unlikely, if not impossible. If Omicron proves to be more virulent the ability to vaccinate, and established strategies to keep businesses and nations operating better in the pandemic, should hopefully mitigate against massive fluctuations.
But as always in uncertain times in the fuel industry, it is important to stay close to the market, and if you’re managing a fleet then you must manage consumption closely.
Make sure your fuel card providers and organisations are set up to see what vehicles are using and what your drivers are spending as this is key to navigating the changing fuel price arena.