July 01, 2014
When we posted our May Oil Market Report http://www.rix.co.uk/blog/2014/6/oil-market-report-may-world-cup-special/ the World Cup was imminent and as we know now, so was England’s early exit. On the positive side though, we were able to track down Panini stickers 77, 236, 405 and 621 but do still need 132 (Ron Vlaar of Holland). England’s sorry performances at major footballing events have become rather predictable over the years and certainly a great deal easier to predict than oil prices. However we did state back in April that along with weather, wars tend to be the major factor behind oil price movements and this view was borne out in June as the military success of ISIS in Iraq drove prices northwards. In fact over a period 10 days from the 5th June, the oil price went from $108 per barrel to $115. Things did ease off towards the end of the month – when it became evident that key Southern Iraqi oilfields were not under threat – but nonetheless the month-end price was still at the $112 mark, a full $3 higher than the beginning of the month.
Now an increase of $7 per barrel in 10 days is a very significant price change and yet consumers in the UK and to a lesser extent Europe, would have been forgiven for noticing very little at the pumps when they went to fill-up. In fact in pence per litre terms prices stayed fairly flat throughput the month, starting at 103.51ppl (wholesale + duty) and finishing at 104.72ppl – a rise of only 1.21ppl. How so, you ask? Well some of it is due to the supply-chain and the amount of time it takes for oil prices to be reflected in refined products at the pump. But of far more profound influence is the $ / £ exchange rate and here is another reason why predicting consumer fuel prices is such a devilishly difficult exercise.
So once again beware the “experts” who tell you which way the oil price is going. Even if they could successfully predict the oil price (which we know they can’t), the likelihood that they could also successfully call the exchange rate is slimmer than England’s chances of ever winning a World Cup. Exchange rates are impacted by a whole host of factors and few (if any) have any linkage or correlation to oil markets. When the Bank of England decides to raise interest rates, if and when the economy stops growing or when competing currencies falter / strengthen are just a few of the factors that drive exchange rates and consequently the price of fuel. Many of these factors are as arbitrary as they are obscure and just like oil markets, the reason that so many financial speculators find exchange rates lucrative is because market movement can be both significant and unpredictable – both ingredients for profitable returns. So when we concluded in the April Oil Market report that wars and weather are the two main drivers of oil prices, we really were only talking about oil prices on a world scale. If you want to look at the consumer end of oil pricing, then add in the impact of exchange rates and here is yet another factor that is largely beyond anyone’s control