Forum

With over 100 years of experience in the fuel industry, we believe there is no question or problem that Portland cannot answer or help you solve. We want to hear your questions and issues with regards fuel buying, fuel quality, fuel consumption, petrol forecourts, grades of fuel, refining etc, etc, etc. The list really is endless and we would like you the fuel user to test us so we can help you!

Feel free to send us a question. We will publish it on this page along with the best answer we can give. Please indicate if you wish to remain anonymous and we will publish the question without your name.

Read our forum questions below:

March 1, 2013 I was reading your September 2012 Oil Market Report and am not sure your VAT figures are correct. Surely a 5 pence per litre rise on 25 billion litres would give an increase in VAT revenue to the Government of £250m – not the £100m you state?

That is attention to detail Nick, although not much of a question for those of you who don’t care much for figures! In fact the £100m figure we state is correct; it’s just we didn’t fully explain in the report why. So here’s the reason; the Government can only raise VAT on non-commercial diesel purchases ie, diesel that is purchased  by the consumer (individual), whilst all VAT raised on diesel sales to business is claimed back by that business. So therefore, only VAT on sales to to private individuals raises money for the Government (excepting the Value Added Tax element on the sale margin – get a VAT tax expert to explain that one).

So if we look at diesel in the UK, we can see that total consumption sits at 25bn litres per annum. But of that volume, only about 40% is sold to private users (where VAT payments are not claimed back and thus go to the Treasury). The remaining volume (about 14bn litres) is bought by business and is therefore claimed back from the Government. So £250m would be raised if all diesel sales were to private individuals. Instead, only 40% of the figure is raised this way and 40% of £250m is…(hey presto) £100m. Nonetheless, good spot. You must have paid attention in Maths at school.

This question came from Nick in Weybridge (Mar 13)

View answer

February 28, 2013 Do you think that prices will fall when sanctions on Iran are dropped and product released? Won't there be a product glut?

Yes – logically you would think so Anthony. Let’s look at the facts first. Up until sanctions were levied, Iran was producing around 3.62 million barrels per day (bpd), was the 2nd largest producer within OPEC and has (according to some estimates) the largest reserves in the world. So to suddenly shut that off from the supply-chain has undoubtedly affected prices upwards. Reverse it and we should see the process reversed and prices driven downwards.

However, 2 possible spanners in the works. Firstly not all production has been shut-out. In fact, Iranian crude is still flowing relatively freely to both China and India – how much we don’t fully know, but possibly up to 3m bpd is still being exported from Iranian facilities. So there may be less product to release onto the wider world market when the sanctions are lifted.

Secondly and perhaps more relevant to prices at the present time is that sanctions look unlikely to be lifted. Unusually for a sanction process, they do seem to have worked; Iran’s financial status is increasingly weak and the ability to import foreign goods is a particular problem. Furthermore, with the current boom in US oil production, it seems that the world – and in particular the USA – has become accustomed to surviving without Iranian crude. Therefore, we see a willingness in the West to prolong the sanctions and play the long game, whilst at the same time, the Iranian leadership seem unlikely to return to the table for dialogue, until a few more degrees of economic desperation have been reached.

This question was asked by Anthony in London (Feb 13)

View answer

February 8, 2013 In your January Oil Market Report, you talk of possible falling oil prices in 2013. Do you also expect the large price differential between WTI and Brent to narrow?

Very interesting question Stephanie and on a subject where our views have changed considerably over the last 18 months. Back then we would have said that whilst the differential between WTI (West Texas Intermediate) and Brent might be justified in the short term (see our answers to Fuel Forum questions in Feb 2011 and Jul 2011), it could not continue in the long-run and over time, the two prices would equalise.

In fact the price gap has been maintained (Brent > WTI by circa $20 per barrel) and we now expect that difference to possibly extend over the next few years. Remember that the Brent price reflects the price of seaborne oil (in other words, international demand), whereas WTI tends to reflect the inland price for oil in the USA. Traditionally the cost of WTI has been a factor of its relative price to Brent (ie, versus what US refiners would pay for Brent imports), but with the explosion of American oil production over the last 3 years (through both conventional oil and non-conventional “tight oil”), local production has become the dominant price factor. And whilst the USA is still many years from becoming self-sufficient in oil terms (and many years from becoming a crude exporter), the glut of domestic product has meant that prices haven’t run away too far, as they have in the rest of the world.

All the projections show that crude production in the States is only going to increase over the next 5-10 years and therefore, we see a continuation of depressed WTI prices versus Brent. We also see that such a prolonged differential will sound the final death knell for WTI as a marker grade for world oil prices, as its use will be confined 100% to the US market.

This question was asked by Stephanie in London (Feb 12)

View answer

December 21, 2012 Why is fuel (and everything else) so expensive in British motorway service stations?

Probably the easy answer to this is because it is a captive market! Let’s face it, when you need fuel or a pasty on a long journey, pulling off the motorway is not the preference, whereas a quick, convenient stop is. In defence of the service station operators though, the law in the UK states that all stations must provide fuel, food, parking and toilets 24 hours a day, 365 days a year, regardless of how many customers there are.  In addition, the service station operator has to pay for all of the costs associated with the operation of the service station area including the construction and maintenance of the slip roads, car parks and buildings. At the same time, service station operators are not allowed to charge for short term parking or use of their toilets, which means that many visitors will make no contribution at all towards the running costs of the site.

Money needs to come from somewhere and hence your mars bar may cost over a pound, and each litre of diesel might be up to 10p more than at the supermarket. In continental Europe, site upkeep is often covered by the relevant highways agency, meaning that retailers only need to cover their own costs and as a result, prices are lower. So although it seems like a rip-off – and yes there is probably some gilding of the lily here – the fact that in 2011, Welcome Break made a loss of roughly £12m and MOTO a loss of £34m, should go some way in explaining why motorway service station prices remain very high.

This question came from Pete in Bedford (Dec 12)

View answer

October 16, 2012 I have read that oil is the most commonly traded commodity around the world, with coffee coming second (in terms of value). Can this be right?

We think that it’s not Firoz, but our figures outside the “oilsphere” may not be 100% accurate.

Annual worldwide production of coffee is circa 8.3m tonnes and the traded price is circa $1.6 per pound. With 2,200 lbs to a tonne, that gives a total poundage weight of 18,432,424,080 (circa 18.5bn) and an annual sales value of $29,492,000,000 (circa $29.5bn). Wheat on the other hand has a worldwide production figure of 653m tonnes, but to confuse things, it is traded in $ per bushel. There are 36.75 bushels in a tonne and with a current traded price of $9 per bushel, annual turnover for wheat is $216,196,000,000 (ie, $216bn). That’s a greater value than coffee by a factor of 7 – so either our figures are way out or the article you read was!

What is not in doubt is that oil is the biggest traded commodity – by far. In fact, what stands out is just how much bigger oil is than anything else. At 4.5bn tonnes per annum, worldwide oil production is 7 times that of wheat and the $ value dwarfs any other commodity. As we know, oil is traded in $ per barrel and the current price is $110. Daily production is circa 90m barrels per day, so that gives a daily turnover of $9.9bn (ie, 50% of the annual coffee figure). The annual turnover figure is circa 17 times that of wheat (122 times that of coffee) at an eye-watering $3,613,500,000,000 ($3.6tn) or by our calculations, about 10% of annual worldwide GDP!

Firoz got in touch from Leicester (Sep 12) with the above question

View answer

August 15, 2012 Many of your monthly reports focus on the basics of supply & demand as the driver for fuel prices, but it is my belief that speculation has a greater effect on prices than economics. How else could you explain the bands that oil trades within, ie, when the price hits the low / 'floor'?

Now that is a good question Stephen and also a very tricky one to answer – not least because the vast scale of the oil market makes it difficult to embrace the whole thing and come up with a simple explanation. But in short, oil price often has a life of its own and very many factors – including speculation – play a major part in the ups and downs of the oil price.

The first thing to do would be to split out those oil traders that buy and sell physical fuel (“Physical Traders”) and those who trade paper contracts only (let’s honour Vince Cable by calling them “Casino Traders”). Physical traders such as BP, Glencore, National Oil Companies (NOC’s) all use paper derivatives to protect their purchases. For example, a physical trader who has just purchased a cargo of diesel with a view to selling the product on, will immediately sell a forward Diesel “Swap” to protect the fuel purchased against falling prices. Alternatively a Refining Company might buy a forward Crude Oil “Swap” to protect against the price of crude (ie, his purchase costs) rising in the future. In this light, we should see “derivatives” as a function of buying and selling fuel, ie, the physical fuel comes first and the derivative is a secondary function.

If we turn our attention to the Casino Traders, then for them, derivatives are 100% speculative – the buyers and sellers no longer have any involvement in the trade of physical oil. If the Casino Traders believe the market is going to rise, they buy “paper stock” (in trading terms, they go “long”) and if they think the price will drop, they sell “paper stock” (in trading terms, they go “short” – which is why betting on falling markets is called “shorting the market”). This activity often takes the form of “floors and ceilings” (trading within ranges), which is what you allude to in your question.

So this is where it gets difficult. In theory the actions of the Casino Traders should be a reaction to the activities of the physical traders, ie, derivatives should be a close reflection of physically traded oil, with the difference between spot oil and paper futures being a reflection of how much risk is being taken by physical oil traders and how much premium they put on protecting their purchases or sales. However, with the explosion of commodity trading and the grand entrance into the markets since 2000 of banks, pension funds, hedge funds, equity houses et al, we have sometimes experienced the reverse situation where (to coin a phrase) “the cart has come before the horse”.

Such a situation is clearly dangerous because not only does it mean that speculation is in the ascendancy over the actual product that is being traded, but more importantly, it means that prices become more a function of how much money is placed on the market. In the same way the odds of a horse move down when punters back it heavily, so a Refinery shut-down in Rotterdam suddenly has less effect on the market than the arrival of a large hedge fund investing in oil futures.

So far then, we have enough information to keep Conspiracy Theorists going all night in the pub. But the truth is that the scale of the physical oil industry (4.5 billion of tonnes of oil sold annually) means that the big moves and the long-term trends are driven by the purchases of the oily stuff itself. Speculators cannot back the wrong horse forever or they are out of the “game”, so they look to the market place and make decisions around the supply and consumption of oil around the world. It is no coincidence that oil prices have risen over the last 20 years as world population has doubled. No coincidence either that oil prices crashed in 2008-2009, when the world headed into the deepest recession since the 1930’s. No coincidence that China’s booming oil demand since 2009 has dragged prices back up. And finally, no coincidence that speculators are only really interested in trading their positions around the largest physical fuel markets (eg, North-West Europe, Singapore, New York Harbour). Casino Traders know and understood all of these factors and make their “bets” accordingly.

In summary, speculators can only fan the flames of the fire, but the fire is created elsewhere. Within short periods of time, speculation can dominate market movements, but the periods are short-lived and trades are unwound when unrealistic prices are reached (again, the “floors and ceilings”. The long-term price of oil is not then set by speculators or for that matter physical oil traders. In fact it is set by Mr Chang, Mrs Sira, Mr Lopez, Mr Nkosi and Mrs Smith as they fuel demand as a reflection of their daily lives and needs.

One final point as you are from Birmingham; do you know what is the difference between a buffalo and a bison? The answer of course is that you can’t wash your hands in a buffalo and no-one outside of the UK will get that joke…

We were asked the following question in Aug 12, by Stephen in Birmingham.

View answer