Why is petrol only 95 cents a litre today?

This is short guest post is from Mark Reynolds with his thoughts on why petrol has fallen below $1/litre in some parts of Australia.

A couple of interesting observations, with supporting data below:

  • Australian petrol prices are based on the price of refined product in Singapore (the so-called MOPS 95 price) which is currently sitting US$10 - $12 BELOW the price of Tapis crude oil. We are seeing negative refining margins, so refiners (including Caltex) must be losing US$15 - $20 on every barrel of petrol they sell. How can this be?
  • On the other hand, diesel in Singapore (Sing 50PPM Sulphur) is sitting where it usually does US$15 - $20 ABOVE crude oil, which gives refiners a decent margin.

Clearly these guys could benefit from some cost-to-serve analysis, you might think.

Actually the situation reflects global factors:

  • Continuing solid demand for diesel all over the world, especially in Europe and Asia, including China, which is a big market for Singapore refiners. So the refiners are making their money on diesel and similar distillates like jet fuel.
  • A glut of petrol, especially in the USA which has an aging fleet of oil refineries struggling to cope with heavier crude oils and unable to shift their product mix very much to follow market demand away from petrol and towards diesel. European refineries also have a growing surplus of petrol because their car market has moved so far towards diesel. So quite a number of refineries are flooding the world with cheap petrol almost as a byproduct while desperately trying to keep up with demand for diesel.

This situation is not going to last. Lots of factors can intervene. Refinery investments are being made to increase product flexibility. Tanker movements of crude oil and refined products around the world should settle down a bit after Christmas. Somali pirates can strike again. The financial crisis will continue to deal unexpected cards. The US$ will eventually fall in value, raising our prices.

So rush out and buy 95 cent petrol while you can. It may go down further, but probably not for long unless the financial crisis does another serious lurch downwards.

Daily Singapore Energy Prices in US$ per barrel (1 barrel = 159 litres)
Week Ending 28 November 2008, Source: Platts

So it boils down to an imbalance between what refineries are configured to produce out of a barrel of oil, and what the market now wants on average out of a barrel of oil.

Refinining industry is going into a big bust phase since product demand is going to fall below the total capacity of the system. Some older refineries which cannot yield higher proportions of petrol/gasoline will need to close until the total capacity is brought back into line.

The diesel/petrol imbalance will probably remain for quite some time, so petrol is likely to stay cheaper relative to diesel, although the magnitude of the difference may reduce as upgrades to refineries focus more on diesel, but such a change takes a long time.

Interesting numbers Mark - I didn't realise the petrol to diesel price imbalance had gotten so large.

Courtesy of a link from the wonderful team over at The Automatic Earth here is a LOT more detail on the problems US refineries are experiencing. http://blogs.reuters.com/great-debate/2008/12/01/bleak-outlook-for-us-oi...

Cheers, Mark

Thanks for the insights Mark,

But surely this imbalance between petrol and diesel hasn't arisen in the last two months?

The ever-useful fuel-watch site (http://www.fuelwatch.wa.gov.au/graphs/dsp_price_trends.cfm) shows that only about half of the petrol price-drop can be attributed to a weakening price relativity between petrol and diesel.

The imbalance I've highlighted in Singapore refined product prices opened up during November. Diesel was typically around $10 higher then petrol during September and October, then the disparity blew out to $20 in early November and has just kept growing.

Cheers, Mark