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Who bewitched fuel prices?

16 Nov 2018 16:36|Marcin Lipka

“What is happening to fuel prices? Drivers can ask this question because we are paying the same price for unleaded petrol and diesel as we did a few weeks ago, while oil prices have fallen by more than 20%,” writes Marcin Lipka, Conotoxia Senior Analyst.

1.61 PLN per litre. This is the average price for unleaded petrol on the European wholesale market ARA (Amsterdam-Rotterdam-Antwerp). This is by 0.49 PLN less than during the high at the beginning of October and over 0.40 PLN less than the average price between June and September this year.

5.07 PLN per litre. This was the average price for the popular "95" found at petrol stations at the beginning of the second half of November, according to data from the European Commission. When compared to the price at the end of October, this meant a barely symbolic reduction at the level of 0.01 PLN per litre, and in comparison with the average price of the previous month, the drops were only 0.02 PLN.

3.46 PLN is the difference between the price of fuel for consumers and the price for ARA, which represents the benchmark for European refineries. Currently, the difference is at the highest level in over 3 years, and it usually remains at the level of about 3.10 PLN, including taxes (excise duty, fuel fee and VAT) and margins (retail and wholesale).

What is happening abroad?

Interestingly, a very similar trend to the one observed in Poland can be seen across Europe.

Data from the European Commission shows that the weighted average price of unleaded petrol in EU countries is 6.35 PLN. Since June, it has remained close to this level, and the difference between the wholesale and retail prices amounts to 4.74 PLN and has been at the highest level for at least 8 years. It is also about 0.40 PLN above the multi-monthly average.

All the time, however, a mystery remains to why such strong falls in the wholesale market do not translate into retail reductions?

Retailer's rule: do not play with discounts

A rapid drop in petrol prices is the ideal moment to improve the usually quite low margins on fuels. Keeping the retail price at a constant level for at least a few days longer may improve the margins for retailers over a given period of time.

Naturally, there is a risk that competitors will start to disrupt this process, but from experience, retailers know that jumping on the discounts wagon simply does not pay off. On the other hand, sudden price drops on the wholesale market happen relatively often. Such a situation occurred at the turn of 2014 and 2015 when wholesale petrol prices dropped from 2.25 PLN to 1.20 PLN.

At that time, European retail prices were relatively high for a long period, and the difference between the wholesale and retail market reached the level of 4.60 PLN per litre. However, it was 0.14 PLN lower than today. Is this a sign that there is more to why prices are kept high?

Diesel is the culprit

At European and Polish petrol stations, the primary fuel is not petrol, but diesel. According to Eurostat data, it is sold 3-4 times more than the popular “95”. In most cases, therefore, the margin on diesel oil is much more important than on petrol, taking into consideration the revenue from fuel sales.

At the turn of September and October, diesel margins in Poland collapsed. This was a result of a strong increase in diesel prices on the European wholesale market. The difference between the retail price and the price before tax and margins fell to the level of 2.66 PLN, which was the lowest for over two years.

Very similar relations were present across the whole of Europe as well, although movement was slightly less violent than in Poland. Wholesale prices increased as a result of tensions on the diesel market in the Old Continent.

At the end of the summer, stocks of this fuel were lower than usual due to the unexpected culmination of delays at European refineries and the explosion at the Bavarian refinery. Drought, on the other hand, made it very difficult to transport diesel on the Rhine, resulting in the necessity to mobilise strategic reserves in Germany.

The butterfly effect

Germany was also forced to look for diesel around the world. Supplies of this fuel increased significantly from Russia, and a few days ago Reuters wrote about a so-called butterfly effect. This consists of a relatively insignificant event in one part of the world causing a strong influence on the whole market. The situation in Germany is an example of this. An insufficient supply of diesel in Europe increases prices and makes it economically worthwhile to import resources even from Singapore, which is 10,000 km away. In addition, it also makes diesel fuel prices increase globally.

This is why diesel still remains relatively expensive despite a very strong fall in oil prices. On the ARA market, it costs 2.10 PLN, i.e. close to the average price from June-October and only cents below 4-year highs.

Price policy

An element difficult to measure, but probably important in the context of the pricing policy at petrol stations, is the fact that diesel (due to lower taxes) usually costs less than petrol. This regularity is visible both in Europe and Poland.

Events on the wholesale market justified the increase in diesel above the price of unleaded petrol. However, this happened much earlier, before the standard price relations at the stations reversed. Retailers could keep diesel prices unnaturally low to avoid discouraging customers. At some point, those who bought petrol financed the lower price of diesel...

Things will return to normal, but give it time

If nothing dramatic happens, we should see strong drops in petrol prices in the coming days. Perhaps in the next week prices will return below 5.00 PLN per litre. December will probably welcome us with the popular “95” being close to 4.80 PLN per litre or even slightly lower.

In the case of diesel, it will be much harder to expect lower prices. On the wholesale market prices are still high. It is possible that diesel oil will remain above 5.00 PLN even until the end of the year, especially if the coming weeks in the northern hemisphere turn out to be exceptionally cold.

16 Nov 2018 16:36|Marcin Lipka

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