Mind the gap

06 August, 2015
As average diesel prices at the pumps drop below unleaded, John Wood explores the factors that are driving prices and where they will go next
Page 10 

Over the past few months, as the gap in wholesale prices for diesel and unleaded petrol has narrowed, a debate has raged between motoring organisations and retailers as to whether drivers were paying too much for diesel.

While the AA and RAC pointed to the wholesale cost, the dealers explained that the issue of fuel cards mean that setting the pole price for diesel is far more complicated than just adding a margin.

But when the RAC revealed that wholesale diesel prices had stayed below those of unleaded for the whole of June, it was probably inevitable that one of the supermarkets would spot an opportunity to grab some positive headlines.

Morrisons, which has usually been a follower of other supermarket groups' cuts, suddenly became the leader on July 20, as it announced it was cutting 2ppl off its diesel prices. Mark Todd, petrol director for Morrisons, said this meant that at many of its sites diesel would cost less per litre than unleaded. As the last time average diesel prices were below those of unleaded was July 17, 2001, he was able to add: "This is a milestone in motoring and many younger drivers won't remember the last time that diesel prices were lower than unleaded." However, with a candour rarely matched by his supermarket rivals he admitted: "There will be a handful of Morrisons stations where diesel prices will remain higher than unleaded and this is because of local competitive factors."

Within hours its three big rivals all piled in with 2ppl price cuts on diesel and Asda announced the national ceiling on the price of its diesel would be 112.7ppl, compared with its 113.7pl cap on unleaded prices. A week later Sainsbury's, Tesco and Morrisons all announced further cuts of up to 2ppl on diesel and on July 28 the average price of diesel in the UK slid below unleaded. Experian Catalist, which monitors dealers' prices across the UK on a daily basis, reported that the average price of diesel was 116.28ppl compared with 116.64ppl for unleaded petrol. James Haigh of Experian Catalist confirmed that although the average price differential had gone quite low on several occasions, meaning that a few outlying sites may have sold diesel cheaper than their unleaded, it was the first time the average price differential had reversed in 14 years.

Basil Shrourou, oil analyst at fuelpricesonline.com, said a combination of factors had driven the wholesale cost of diesel down. Demand for diesel usually falls in the summer because it comes from the same part of the barrel as heating oil, and demand for heating is low. Meanwhile, global demand for unleaded increases because of the American driving season, and these two factors mean the price of diesel usually decreases in relation to unleaded. However, with the majority of European refineries being set up to produce unleaded petrol, Europe has always been short of diesel and has been importing large quantities, and for the past 14 years the impact of this summer trend has not been great enough to push diesel prices below unleaded at the pump.

The factor that has driven this summer's reversal of the usual order of pricing is a new source of diesel from Saudi Arabia. Shrourou explains: "Two huge refineries have been developed and are coming on board, so the Saudis are no longer exporting just crude, but product as well." This extra supply has been putting downward pressure on diesel and the wholesale price of diesel has been less than the price of unleaded since the end of May.

Shourou says there is still scope for diesel to fall by another 2-3ppl in relation to unleaded and he expects diesel prices to remain lower than unleaded for the rest of the summer. The big question is whether the increased supply can keep up when demand increases in the winter. He says a cold winter can have a big influence on demand and it remains to be seen whether the Saudi diesel will be sufficient to keep prices depressed.

Looking at fuel prices more generally Shrourou says there does not appear to be any upward pressure. There is already over- supply globally; China's economy is slowing down which will reduce global demand; and Iran's new treaty over its nuclear facilities is likely to mean even more crude will be released into the market.

He says that the Iran deal is likely to put a lid on prices but it is not clear whether they will go much lower. In January, when the average unleaded petrol price fell to around 106ppl, crude oil was trading at $45 a barrel.

As Forecourt Trader went to press the price was falling but was still above the $60 mark.


Putting the squeeze on profits

The continuing low oil prices have contributed to a fall in profits at BP and Shell, which both revealed their performance in the second quarter last week.
BP's underlying profit for the second quarter of 2015 slipped to $1.3bn. This compared with $2.6bn for the previous quarter and $3.6bn for the second quarter of 2014.
However, an agreement to settle claims arising from the 2010 Deepwater Horizon oil spill, resulted in a charge of $9.8bn which pushed BP to a loss for the quarter of $6.3bn.
Bob Dudley, BP's group chief executive, said: "The external environment remains challenging, but BP moved quickly in response and we continue to do so. Our work to increase efficiency and reduce costs is embedding sustainable benefits throughout the Group and we continue with capital discipline and divestments.
"In the past few weeks oil prices have fallen back in response to continued oversupply and market weakness and the recent agreements regarding Iran. I am confident that positioning BP for a period of weaker prices is the right course to take, and will serve the company well for the future."
Shell's profits for the second quarter were $3.3bn, 35% down on the same quarter last year. Shell's CEO Ben van Beurden said: "Shell's integrated business and our performance drive are helping to mitigate the impact of low oil prices on our bottom line.
"We have to be resilient in a world where oil prices remain low for some time, whilst keeping an eye on recovery. We're taking a prudent approach, pulling on powerful financial levers to manage through this downturn."
In its results Shell added that the oil price downturn could last for several years, but there was the potential for a return to a $70-$90 per barrel oil price band in the medium term.





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