The oil market has been subjected to significant volatility over the past year. We analyse why this has happened and what impact it will have on fleets. By Paul Holland, Managing Director for UK Fuel, Fleetcor
The past year has been characterised by political upheaval and economic uncertainty, and this has resulted in a marked volatility in the price of oil, and uncertainty in the cost of fuel. Subsequently, this has made it hard for fleets to project costs accurately and additionally, impacts day-to-day running costs.
In the last quarter of 2018, the commodity price of a barrel of oil plunged from $85 to $50. But that low level did not last and during spring 2019 it rose again, to around $75 in April. Over recent months, the price has fluctuated around $60 before climbing to its most recent peak of $72 – over 40% higher than the start of the year.
The reason for this instability is largely the perceived risk to supply. In the Middle East there have been a number of incidents between various nations which have created a lack of confidence in the ability to provide oil. Much of this stems from the US’s stance on Iran’s nuclear ambitions. This has created tension and sparked events such as oil tankers being attacked, and tankers indeed seized by both Britain and Iran, while more recently the drone strikes on Saudi oil facilities, reportedly by Houthi rebels, and possibly backed by Iran, caused prices to spikejumping by nearly 20% and make their largest daily gain in approaching 30 years.
There are other less dramatic, but no less influential, factors at play too. Central to the price of oil is the relationship between major economic blocks about how to manage supplies: the US has been producing record volumes in order to reduce prices (culturally as a nation, it expects low fuel prices, and perhaps in 2020, an election year, Donald Trump will demand it) while OPEC, which exports oil, wants higher prices in order to increase margins and uses supply to try and manage the barrel price point. At the start of July, OPEC+ members agreed to continue with its 1.2 million barrel daily production cut, until March 2020. So this fundamental contrast in production strategies is set to continue, and create instability.
Then there are the continuing tensions of the US-China trade war, and economic slowdown in Europe and around the world. Projections suggest that demand will fall, resulting in an oversupplied market space, which could depress prices.
So there is a constant push and pull on the supply of oil from a number of directions, and those forces have been increasing over the year, leading to these large swings in price. This then has a knock-on effect on the cost of fuel purchased at the roadside, especially as retailers may have to take conservative positions on price in order to mitigate against dramatic variations in the cost of oil.
Not surprisingly, the wholesale fuel market in the UK has been volatile because it is intrinsically linked to global events, but there are other issues in the UK market to consider too, notably Brexit.
The price of fuel in the UK is influenced by factors including the Pound’s exchange rate against the Dollar, refining, transportation and retail margins. At the start of the year, average pump prices were around 107.5p/litre excluding VAT, while today, the average is 110p/litre, although expected to rise due to the recent spike in the oil price.
However, fuel is especially expensive at the moment in the UK because the effect Brexit has had on exchange rates. With the Pound weak against the Dollar (this has resulted in the cost of oil imported into the UK rising. For example, Sterling fell 10% against the US dollar the day after the EU referendum, driven by the surprise of the result. This exchange rate decline resulted in more than a 5p/litre increase in the price of fuel, and the weakness has continued, with the commensurate high cost for petrol and diesel.
Over the next few months, the effect of exchange rates on the price of fuel will depend on the exit deal negotiated, but as we have seen, the scenario is constantly shifting, both locally and globally. Perhaps the only certainty for the foreseeable future is more uncertainty.
Businesses might not be able to avoid the impacts of geopolitical crises, but with better fuel management you can mitigate any price rises.
1. Buy fuel better
By using fuel cards to obtain discounts, by bunkering, or buying fuel from cheaper retailers, your fleet can make significant savings.
2. Understand your vehicle costs
Analyse which vehicles are costing you most money, and schedule jobs and routes to use those with lower running costs.
3. Educate and train drivers
Better drivers, who plan routes, buy fuel cleverly and drive more economically will save your business money.