Road fuel margins draw political gaze

Author Elliot Radley, Editor

As inflation soars and with it the cost of goods and services across the globe, increasing attention is being paid to the rising cost of energy, particularly sectors that greatly affect consumers, such as road fuels.

Fuel prices at the pump across Europe have continued to set fresh record highs in recent weeks, leading some governments around the continent to take action, including the introduction of price caps, tax cuts, and even investigations into pricing within the industry.

But the reality is that soaring crude values and tight supply-demand fundamentals are supporting the price of crude and refined products in the Atlantic basin, and that further disruption to typical trade flows could lead to continued growth in prices in the coming weeks and months.

The UK government has ordered a competition inquiry into the retail road fuel sector, concerned that its 5 pence/litre cut of road fuel excise duty made in March is not always being passed through to consumers. The UK’s Petrol Retailers Association quickly hit back at the news, saying the move shows “ministers don’t understand how fuel prices are set” and that retailer margins were only around 6p/l at the start of June.

The premium of pump prices to wholesale prices does appear to have risen since the UK duty cut.

Argus assessed non-oxy gasoline cargoes delivered to Thames at 57.09p/l on 1 March prior to the cut, while UK government data show gasoline prices at the pump were 152.95p/l in the first week of March, marking a premium of 95.86p/l.

Argus assessed non-oxy gasoline cargoes delivered to Thames at 62.59p/l on 1 April, after duty had been cut, while pump prices in the same week were 161.91p/l. That marks a premium of 99.32p/l, wider by almost 3.5 p/l.

But while pump premiums of almost 100p/l to wholesale prices at first appear wide, in reality retail margins are likely to be relatively thin.

On 1 April, Argus wholesale prices were 62.59p/l, but fuel duty of 52.95p/l and VAT at 20pc, or roughly 27p/l, must also be taken into account. That brings costs to 142.54p/l, or just 19.37p/l below the retail value.

The cost of up to 10pc bioethanol must also be accounted for. Argus assessed ethanol in Europe at around 94.81p/l on 1 April, implying a cost of 9.48p/l for gasoline use.

Those additions bring the total cost to 152.02p/l, just 9.89p/l below the UK retail price in first week of April — although that is without accounting for any inland logistical costs or the reported 6p/l margin being captured by retailers.

What have certainly rocketed, however, is refinery margins being captured by those further upstream in industry, which has been widely documented in recent weeks. Finnish refiner Neste said this week that its refining margin is likely to double to over $20/bl (10p/l) in the second quarter from the first, from an already elevated level. And Poland’s PKN reported a Brent-linked model refining margin at a record $24.30/bl in May, up from $20.50/bl in April and $1.30/bl in May last year.

Argus data support this. Argus assessed gasoline premiums to benchmark North Sea Dated crude at almost $20/bl on 1 April, up from $1.82/bl on 1 March, although premiums rose above $56/bl, or 35p/l, in the early days of June.

So while various government initiatives to ease the pain that consumers face may be well-intentioned, it is possible that efforts are being focused in the wrong place.

Learn more about Argus road fuels coverage, including price assessments, latest market-moving news, in-depth analysis, price forecasts, forward curves data, and listen to podcasts from industry experts.

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