The price of a litre of fuel has fallen significantly in recent weeks. However, Fuel prices are falling while everyone’s at home, the benefit of the price reduction is not being felt by many, other than those who need to carry out essential work.
In recent days, however, prices have fallen again at around $28 a barrel at the time of writing(19 April)
Why are prices falling and how much longer could motorists benefit from this situation?
Price movements on forecourts are pretty much dictated by the vagaries of international oil markets.
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Every Government taxation makes up a large portion of the price of a litre of fuel, but that element does not change significantly.
Taxes are pretty much baked into the equation. So when there’s a shock to the global oil supply, that is when we generally see prices moving upwards or downwards.
Oil prices globally started to taper off towards the latter part of last year, according to Job Langbroek, Resource Analyst with Davy Stockbrokers.
The effects of the US-China trade war shifted seamlessly into the Covid-19 crisis, which resulted in a sharp fall off in oil demand early this year, he points out.
That demand shock then spread to the rest of the world as air transport ground to a halt and the traffic of goods by sea and land gradually stopped.
On top of that, the oil producing nations of OPEC and Russia couldn’t agree on continuing a strategy of capping daily oil production in order to support the oil price.
The production caps, which had been in place since late 2016, had seen the price of a barrel of Brent crude – the international oil price benchmark – stabilising at between $50 and $70, having dipped as low as $30 dollars in the preceding years.
“However, this was allegedly too much for Russian oil groups, resulting in the collapse of the three-year-long deal. Oil prices responded predictably and crashed.”
The price went as far south as $25 a barrel, then stabilised at around $30 on the conclusion of an agreement between the sides that’s promising a collective production cut of up to 10 million barrels of oil a day – amounting to about 10% of global demand prior to the pandemic.
In recent days, however, prices have fallen again with Brent sitting at around $28 a barrel at the time of writing(19 April)
Why does it take so long for fuel prices to fall, but they appear to go up overnight?
Usually when we see a sharp increase in fuel prices, it is as a result of a taxation hike in a budget, for example. In that situation, the price rise generally takes effect at midnight following the unveiling of the budget.
As regards oil prices, fuel pricing follows the Brent crude benchmark pretty faithfully, according to the AA.
There is generally a lag between the Brent price falling and that saving making its way through to the forecourts, but there is little evidence to suggest that the retailers are profiting off price falls or price gains.
A major study of fuel prices here carried out by the National Consumer Agency over 10 years ago found that fuel retailers do not artificially inflate prices.
So how long can we expect the current low prices to last?
There does not appear to be much hope that the agreement to cap output by OPEC and its allies will drive the price of oil any higher, if at all. In fact, it’s fallen back again in recent days.
“This may be the largest ever cut, but we’re living through an unprecedented event and demand has fallen off a cliff,” Craig Erlam, Senior Market Analyst with Oanda said.
“It’s no surprise to see oil prices paring back the early April gains to sit not far from their lows.”
Job Langbroek of Davy believes it will be several months, at the earliest, before prices can start to get back on an even keel.
“Given the projected disease trajectory in main markets, it may well be mid-summer before oil demand begins to improve,” he said.
However, with the IMF now forecasting a severe recession of the magnitude of the 1930s Great Depression, the pickup in the demand for crude may be slower than many would have hoped, Oanda points out in a trading note.
So lower fuel prices might be with us for the medium term.
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