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Why the oil price is volatile, but petrol and diesel prices are not

Since the beginning of 2020, the price of Brent Crude Oil peaked at just under $69 a barrel before dropping to a little over $25, a fall of 64%[i]. In the same period, fuel prices at the UK pumps dropped just 15%[ii].

Earlier this week it was reported that benchmark US oil prices turned negative for the first time. What does that mean for petrol and diesel prices at the pumps? Are forecourts profiting from the drop in wholesale prices?

Like most businesses, fuel forecourts are seeing a reduction in customer visits during the coronavirus outbreak and also a change in the way people travel and use their local forecourt shop. This dramatic decrease in wholesale oil prices is not necessarily good news for your local forecourt in such turbulent times.

Why forecourt fuel prices haven't dropped as much as crude oil

  • Crude oil trades in US dollars

Since the start of 2020, the pound to dollar (GBP/USD) exchange rate has fallen, meaning that you get fewer dollars for your pound. This mild correlation with the drop in crude prices means that you don't see the same reduction in pounds per barrel that you do in dollars per barrel.

  • Most of the cost of petrol and diesel is static

Fuel duty, green taxes and delivery costs make up over 50% of the price of a litre of fuel. The change in crude oil prices doesn't affect these so the majority of the pump price isn't affected by the cost of crude oil.

  • Fuel only makes up 20-30% of the overall cost

With most of the costs being static, only a small proportion of the price of a litre of fuel is directly affected by the crude oil price.

  • The forecourt margin

Margins for fuel at the forecourt do fluctuate, but competition will limit by how much. Fuel forecourts with a high turnover of stock, such as supermarkets, can drop prices more readily than those with a lower turnover; making trading difficult for smaller forecourts.

  • Only the West Texas Intermediate (WTI) May contract went negative

Most of the world's oil trades on the Brent benchmark. The WTI is the second most traded benchmark for crude. Due to local US conditions, the May contract for WTI went negative, but not all benchmarks did.

Why are oil prices volatile?

How does this affect me?

In light of this volatility, the 15% drop in the petrol price is still significant. On a 50 litre fill up this equates to a £9 saving, and for someone travelling 8,000 miles a year that's a saving of £190* per year. With global demand depressed prices are due to stay low for some time to come; this is welcome news for the UK motorist, but if demand at the forecourt continues to be sluggish, it may cause significant problems for your local fuel station.

*based on 35 miles per gallon

Sources: [i] Businessinsider.com - https://markets.businessinsider.com/commodities/oil-price on 22nd April 2020 [ii] Gov.uk - https://www.gov.uk/government/statistical-data-sets/oil-and-petroleum-products-weekly-statistics on 22nd April 2020