English
Danish
Finnish
Norwegian
Swedish
Petrol and Diesel – Summer holiday outlook
No clouds in the petrol market, but grey clouds on the horizon for the diesel market this summer
As we approach the peak summer holiday season in the US and Europe, people will rush to the petrol stations to fill up their cars or boats. But will they have spent everything after the holiday? Or do we see a more moderate trend in petrol and diesel prices over the summer holidays? What will determine petrol and diesel prices this summer?
Longer term, petrol and diesel prices track the trend in crude oil prices although they may occasionally deviate sharply from crude oil prices. Petrol and diesel are traded in separate international markets. Both petrol and diesel prices depend on product-specific factors including demand for petrol and diesel, refinery margins by making the various oil products, structural changes in the markets such as more widespread use of diesel cars compared to petrol-powered cars, energy efficiencies and changes in taxes.
Crude oil prices were lifted sharply during the spring as a result of political unrest in the Middle East and North Africa (MENA) region, oil production cuts in Libya, low crude oil inventories and higher demand for oil following a gradual improvement in the world economy. The rise in crude prices gave a solid lift to both petrol and diesel prices. Even so, relative to the upward move in crude oil prices, petrol prices outpaced the rise in diesel prices seen towards the end of April and in May. Several, slightly unusual factors were at play:
- The loss of Libyan oil was not easily replaceable by Saudi Arabian oil due to quality differences.
- Petrol production was lower during the maintenance season for European refineries.
- Russian petrol exports to Europe were cut to cover growing demand in the domestic market.
- Petrol inventories in Europe were lower.
Petrol demand sees a seasonal increase during the summer when notably Americans but also European use their cars for the summer holiday. Although we are moving into the peak holiday season in the US and Europe, and despite somewhat lower petrol inventories than a year ago, we do not anticipate the same pressures in the petrol market this summer. Why? We are still in a soft patch for the US and European economies. Last week’s US labour market report was by no means encouraging. Yesterdays US oil inventory may have been another warning signal. Petrol and diesel demand fell markedly and may indicate a slowdown of the economic activity. Soft growth indicators and recent growing worries over the debt-ridden PIIGS countries in the Euro area have also dampened oil market sentiment. In this situation we do not expect to see holidaymakers rush to the motorways this summer. Also, the IEA’s decision to release emergency reserves of crude oil, petrol and diesel will help to reduce pressures in the petrol market. So we do not expect any particular pressures in the petrol market this summer, and petrol prices should track crude oil movements. Key risks to our forecasts are excessive surprises during the hurricane season (as was the case with Katrina and Rita in 2005) or political unrest in the MENA region, Nigeria or Sudan/South Sudan triggering further oil production cuts.
We are, however, more worried that the diesel market could tighten over the summer and become a driver of crude oil prices. In addition to the usual recovery in diesel demand for transport (in Europe more and more people are using diesel cars) and electricity production to keep air conditioners running in the summer heat, slightly more unusual events may affect diesel demand going forward. The reconstruction of the earthquake-ravaged areas in Japan will boost demand for diesel as a transport fuel. Also, demand for crude oil and diesel for use in emergency equipment will increase; this is necessary to replace the electricity production from the ruined nuclear power stations. China is likely to experience a squeeze in the electricity market when electricity consumption reaches a seasonal peak in July/August as a result of problems with coal and hydropower production. To have better access to power, China is likely to expand the use of diesel equipment. The IEA’s release of emergency reserves may alleviate the situation somewhat. But a surge in demand could drive diesel prices even higher compared to crude oil prices.
In Q3 we see crude oil prices around USD 110/barrel, rising to USD 118/barrel in Q4. The IEA’s release of strategic reserves should only put a short-term cap on oil prices, which are likely to rise again as soon as the emergency reserves are no longer used. Short term, there are worries over the debt-ridden countries in the Euro area, the publication of stress tests of 91 major European banks and President Obama’s attempt to secure a budget deal before 2 August. These factors may affect risk appetite and trigger a sell-off of more risky assets such as oil. This may dampen pressures on crude oil prices and thus petrol prices at the beginning of the summer holidays. If you fill up with diesel, you could face higher diesel prices towards the end of the summer. This rise will be driven by growing demand for diesel for the reconstruction after the Japanese earthquake and electricity problems in China.
Other news
