Petrol and diesel prices finally broke out of their strong rising trend last week, with the government’s official tracker showing a drop of nearly 1p per litre across the UK.
But are we seeing the start of a return to cheaper fuel or are prices merely taking a breather on their way to a new high?
The short answer is that UK pump prices are set to stay at elevated levels for the foreseeable future. Here’s why:
Steady outlook for oil prices
Crude oil’s increase from $45per barrel last year to nearly $80 in May is the primary reason for the rapid run-up in fleet refuelling costs.
Russia and Saudi Arabia hold the key to where oil prices go next. They may decide to increase production, but any extra barrels will be cancelled out by falling exports from Venezuela and Iran.
Tensions involving Iran always raise prices because Tehran could theoretically blockade the Straits of Hormuz, the main transport artery for Middle East crude. The risk premium in the oil price, which fluctuates in line with geopolitics, is already moderate-to-high over the Iran nuclear deal sanctions.
The US, despite its massive increase in output of tight (fracked) oil, remains a net importer and thus not able to flood the market with cheap oil. Nor does fracked oil make good vehicle fuel. It has to be mixed with kerosene (jet fuel) to get usable diesel: which hurts airlines.
Overall, there is plenty of support for the current $65 oil price and no fundamentals pointing to another slump. At $65, there is no chance of UK petrol and diesel returning to under £1.20 per litre.
UK fuel market: will lower volumes bring higher prices and taxes?
The UK Petrol Retailers Association said last week it could only see petrol and diesel prices going up as fuel retailers try to maintain margins in the face of falling sales due to the take-up of hybrid and electric cars.
And with £34 billion of annual tax revenue from fuel duty and VAT at stake, it is debatable how much longer the government will refrain from raising fuel taxes when falling volumes start to eat into its income. In fact, it’s been reported this week that the government is seriously considering lifting the fuel duty freeze, further increasing the cost for businesses.
TMC can help mitigate these cost increases – our customers save an average of 18.06 pence per litre. To find out how, click here. Or if you’d like to talk to us about your requirements, please don’t hesitate to contact us.
