February 2015 fuel price update

Pump price rebound fears confirmed as wholesale costs climb 15%

Pump price rebound fears confirmed as wholesale costs climb 15%

Pump price rebound fears confirmed as wholesale costs climb 15%

Deep scepticism among AA members that falling pump prices would quickly rebound has proved well founded. In the past fortnight, petrol and diesel prices have risen 1.5p a litre, according to the AA Fuel Price Report.

In January, a quarter of AA members said they were still keeping a tight lid on their car use despite the pump price crash – among lower-income groups it was 30%*. They can take some consolation in slightly lower prices now than in mid-January, despite the surge in recent days.

The average price track since mid-January looks like this:

  • Mid-January: petrol 108.91p/litre, diesel 116.11p/litre
  • 1 February (low point): petrol 106.39p/litre, diesel 113.42p/litre
  • Mid-February: petrol 108.28p/litre, diesel 115.06p/litre

A penny a day

At the start of this week, it was still possible to find petrol selling at 103.9p a litre in many built-up areas as supermarkets and some non-supermarkets delayed the price rises. However, drivers started to complain as prices at some forecourts rose a penny a day in quick succession.

In the absence of fuel price transparency, which would show a 15% increase in wholesale petrol and diesel costs in the past fortnight, retailers took the brunt of criticism.

Margins up 2p/litre

The AA has compared the UK’s average pre-tax pump price of petrol against its wholesale cost over the past six months and this shows that there was a period when retailers and suppliers increased their margins by up to 2p a litre or £1 a tank. Some of that will have been the influence of rural towns suffering from higher prices compared to larger towns with better competition.

Squeezed margins

Overall, though, the relationship between the two shows that the fierce and sustained price war in January squeezed the margin back to where it was six months earlier. Indeed, despite some rapid price rises on many forecourts in recent days, the full force of a 4p-a-litre hike in wholesale costs has yet to hit the average pump price.

Marginal gains

Changes in the wholesale price take 10-14 days to be reflected at the pump.

  • In late August, wholesale petrol prices hit a three-week plateau and that was reflected at the pump through September. This created a gap between wholesale and the pre-tax pump price of around 6p a litre.
  • Through most of November, wholesale stabilised at around 37p a litre but with the average pre-tax pump price stuck at around 44p - boosting the margin to 7p.
  • By mid December, the wholesale price had reached a two-week plateau of around 26p a litre but, a fortnight later, the pre-tax pump price was 34p increasing the margin to 8p a litre.
  • In late January, after the wholesale price held at around 24p a litre, the pre-tax pump price closed the gap back towards 6p a litre before a 4p-a-litre hike in wholesale costs hit the market.

Commodity speculation

Away from retail pricing, the AA’s main concern rests with the impact of commodity speculation on fuel prices. Capitalising on low oil prices makes good business sense but the sheer scale of speculative activity in this market highlights the cause of continued price volatility – despite current global over-supply. Latest ONS trade figures show that, of the £0.9 billion rise in UK imports in December 2014, £0.6 billion of it was down to oil imports. The volume of oil imports reached its highest level since July 2008, growing 37.5% between November and December.

30% rebound

It is therefore perhaps no wonder that the price of oil has rebounded 30% since mid January, from $46 a barrel to above $60 this week. It was initially propelled by bullish sentiment that rejuvenated demand and oil production cutbacks would hit supply, helped by a weaker dollar driving investors back into commodities. Now, concerns about oil supply in Libya and northern Iraq have maintained the upward momentum.

Price volatility

Oil and wholesale fuel price volatility remains the big threat to UK motorists and businesses – one they know is there but can’t get a proper measure of because wholesale fuel price transparency is denied to them. And so, at least one in four drivers continues to restrict car travel and guards family budgets against yet another big rise in road fuel costs.

While the focus was on the remote possibility of a £1 a litre for petrol, motorists bitten by years of severe price volatility and having a little more sense continued to drive cautiously

Edmund King, AA president

More sense

“While the focus was on the remote possibility of a £1 a litre for petrol, motorists bitten by years of severe price volatility and having a little more sense continued to drive cautiously. UK petrol consumption has remained lower than when it was 13p a litre more expensive,” says Edmund King, the AA’s president.

“As the AA has always said, the best guide to where prices are heading is recent history. In 2009, following the previous year’s oil and pump price crash, the petrol price rebound started in the first week in January. Six years later, it was the first week of February – only one month later.

“In 2009, supposed ‘green shoots’ of recovery based on Chinese economic activity sent speculators back into commodities. Last week, the International Energy Agency (IEA) reported that “Oil prices rebounded from near six-year lows …as market participants took stock of declines in US rig counts and relatively positive US economic data.” This is despite the IEA reporting that Q4 2014 oil supply of 94.34 million barrels a day outstripped demand of 93.53 mbd - with Q1 2015 demand expected to fall to 92.55 mbd and Q2 down to 92.45 mbd.”

Around $50 a barrel

King adds: “There is hope that the price of oil will settle back to around $50 a barrel. However, the lesson of 2009 is that, apart from a short period of falling prices in the summer, the cost of petrol maintained a gradual climb through to the May of 2010. Today’s mpg misers may yet have the last laugh.”

National and regional

Across the UK, Northern Ireland’s average of 107.6p a litre for petrol is the cheapest while drivers in Wales and the West Midlands are paying most, averaging 108.6p a litre. Diesel is least expensive in Northern Ireland, averaging 114.2p a litre, while it costs most in East Anglia at an average price of 115.6p a litre

(18 February 2015)

Fuel price data supplied by Experian Catalist

Wholesale price data provided by fuelpricesonline.com

* Populus received 18,806 responses from AA members to its online poll between 19 and 27 January 2015. Populus is a member of the British Polling Council and abides by its rules.