Cheap gas for a year? Great news for drivers [CINKCIARZ.PL ANALYSIS]

Aug 2, 2016 1:43 PM|

Relatively low prices may remain until next summer’s vacations. Polish drivers will possibly pay around 4 PLN per litre for diesel and unleaded fuel. Why? Marcin Lipka, analyst explains.


On Monday, petroleum prices dropped below 40 USD per barrel. But, lower prices of petroleum are not the most important thing. Primarily, the world is facing an oversupply of fuel. The result is a rarely observed decrease of refuelling during the height of the summer season.

Many drivers have probably noticed that over the past few weeks we have faced a visible fuel price decrease at national petrol stations. According to data from the European Commission, the average unleaded fuel price per litre at the end of July was 4.38 PLN. The price for diesel - on average - was 4.13 PLN. This price is about 0.20 PLN more in comparison with the values noted at the beginning of June.

Even larger differences are observed with both fuel prices from last year. During the height of the summer season, we must have paid 5.03 PLN per litre of unleaded fuel and 4.61 PLN for diesel. Why have we been observing such major refuelling disparities since the oil price has not drastically changed over the last year?

Oversupply on a fuel market

In the long term, percentile changes of fuel and petroleum prices more or less coincide. The differences between particular world regions are not enormous either. However, we have been facing a different situation this year. A petroleum oversupply, which has been observed over the last quarters, started to decline, but the increase of the fuel demand has not been following the possibilities of world refineries.

In the United States, according to the Department of Energy (EIA), petrol stores are at the level of 241.5 million barrels - which is almost 12% higher than last year. These have also been the highest values in the summer season for at least 25 years and additionally they have a growing trend. This is unusual in this particular season, which was historically characterized by fuel demand at its peak.

The demand for fuel in China is fairly low. The demand for petrol increased in June by 2.5% in relation to the year, and the demand for diesel decreased by 6%. As a result, China even started selling fuel abroad. Its export in June was over 1 million tones - which is the most in the history of the Middle Kingdom.

Too high fuel production, in comparison with demand possibilities and their record-breaking stores in many world regions, cause petrol or diesel prices to decline faster than oil prices. ARA 95 (Amsterdam-Rotterdam-Antwerpia) petrol, which is the Europe fuel price indicator, is currently 30% cheaper than it was during the same period last year. On the other hand, the oil barrel cost declined 11% at the same period of time. A similar situation has been observed when it comes to diesel oil, which a wholesale trade price declined 25% year-over-year.

Will prices be low until mid-2017?

A reduced demand for oil in the summer period, record-breaking USA and Europe fuel stores and a persistent oil overproduction all over the world should allow lower prices to continue for at least the next several months.

Obviously every scenario has risks of its execution. In the middle of the year, we had an unexpected mining strike in Kuwait and also severe fires in the oil-bearing regions of Canada. The situation in Nigeria is still unstable. These factors increase the risk of lower than expected mining in this country and higher fuel prices all over the world.

On the other hand, after the last declines in USA oil production, the number of oil derricks has begun to increase. This may mean that technological progress makes enough shale oil mining profitable, even at prices lower than 50 USD a barrel.

It is possible that Libya’s oil production will be restored as long as its political situation stabilizes. According to the National Oil Co., the national oil producer, quoted by The Wall Street Journal, the amount of mining may increase from what is currently 300 thousand to 900 thousand barrels at the end of the year. This is more or less ⅔ of Iran’s production increase total after last year’s sanctions lift.

Taking into account the oil market’s chances and risks, it may be assumed that relatively low prices should continue until next summer’s vacation period. This means that Polish drivers may probably pay around 4 PLN for a litre of diesel and unleaded petrol until the mid-2017.


Aug 2, 2016 1:43 PM|

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