Speculation of $60 anchor for oil
Another jump in US crude stockpiles pushed the price of oil down to $61 a barrel on Thursday, going against indications that there was to be an imminent rise in global demand.
The United States government’s latest supply report shows that domestic inventories of oil rose last week to 434.1 million barrels, setting a record high for the seventh consecutive week.
Brent crude LCOc1 fell 40 cents to $61.24. US crude CLc1 fell 96 cents to $50.03. “At present, it would appear that Brent is bottoming out at $60 per barrel,” said Carsten Fritsch, analyst at Commerzbank. “The renewed sharp rise in U.S. crude oil stocks … points to a market that is still oversupplied.”
Burgeoning crude supplies in the US is further increasing the discount at which US crude is traded to Brent. The spread reached $11.81 on Thursday, the widest gap in over a year.
Brent collapsed in 2014, falling from the $115 high reached in June due to global oversupply. The decline worsened after OPEC (Organisation of the Petroleum Exporting Countries) chose to defend their market share against rival sources, rather than slash its own output.
The price has come back 35 percent from a six year low of $45.19 reached in January, supported by signs that lower prices are starting to negatively impact the investment in US and other supplies outside of OPEC.
Just two months into 2015 and oil prices have bounced back from the January low of just $45 a barrel, much faster than the Saudis had hoped after convincing OPEC members in November not to cut output to defend market share against shale.
Veteran Saudi Oil Minister ALi al-Naimi said that he was happy with the current state of the market, and that he saw oil demand growing in the future.
“The Saudis are saying – look, everything is happening the way it needs to happen. Others are cutting capex, production growth is slowing and low prices are stimulating demand,” said OPEC watcher Yasser Elguindi from economic consultants Medley Global Advisors.
“Of course, the main unknown is how resilient U.S. oil production will be. It may take more than just two quarters for markets to adjust to new patterns. It may take a year or two to sort out what is fair value for crude,” said Elguindi.
“Price may need to be at $60 to allow for a rational supply-demand trajectory. It doesn’t mean of course that we can’t temporarily go to $40 or $80 under certain circumstances,” he added.
Shale oil output in the US is not expected to start slowing in growth until the second half of 2015. This will put oil prices under even more pressure as global stockpiles continue to mount.
If the price of oil does stay around the $60 mark for an extended period this could be troublesome for Saudi Arabia, let alone the poorer oil-producing nations.
“It is interesting that Naimi says he doesn’t like to talk about oil because he wants calmness,” said Olivier Jakob from Petromatrix consultancy.
“After the OPEC meeting…we had the oil ministers of Saudi Arabia, Kuwait and the UAE going to the newswires to talk the market down. They did like to talk oil then and (Naimi’s current remarks) is probably another indication that they have reached their objective,” said Jakob.
British Gas reports slump in profits
Owner of British Gas, Centrica has reported a 35 percent slump in profits, prompting speculation that energy prices will remain low, with the possibility of further cuts coming this year.
The company reported that profits had fallen to £1.7 billion in 2014 due to the drop in gas and oil prices worldwide. Customers used a fifth less energy last year, the warmest on record, causing further problems for British Gas.
Iian Conn, chief executive of parent company, Centrica, said: “lower wholesale prices will persist for all of 2015 and potentially 2016 and into 2017”.
“If prices do stay low then, as we are buying ahead, the average price we have been buying ahead will also fall and if it stays low there is the possibility of further reductions we could pass through to our customers.”
He also said it was “absolutely feasible” that we would see further cuts in the price for oil and gas this year. Mr Conn announced Centrica would be cutting its dividend payments as well as writing down £1.4 billion post tax in the value of its power plants and assets in the North Sea. Centrica will also drastically reduce investment in the North Sea, by 40 percent.
Shares in the company fell eight percent, worse than analysts expected. Mr Conn said: “2014 was a very difficult year for Centrica and the recent fall in oil and gas prices creates further challenge. We are cutting investment and costs in response.” British Gas, which is still the UK’s largest energy supplier continues to lose customers to rivals offering very competitive deals. The problem has been exacerbated by reports from the Competition and Markets Authority, finding millions of hosueholds could save up to £234 a year by switching supplier.
“The market remains highly competitive, with recent reductions in standard tariffs and most suppliers also offering a range of fixed price products,” said Centrica.
The FTSE fell from a 15 year high as a result of the sharp decline in the share price of Centrica. “Centrica is another energy company that is suffering from a low oil price. Also, the fact that they’ve cut their dividend by such an amount will mean that some investors will now look elsewhere for better yields,” said Dafydd Davies, partner at Charles Hanover Investments.
The wholesale price of gas is currently down 20 percent on last year. The big six energy firms, (SSE, Scottish Power, RWE Npower, Centrica, EDF and E.on) which together account for 95% of the UK energy market, insist that the gas price only accounts for 45% of the final bill for consumers, the rest accounting for administration, network maintentance, supploy costs and profit.
Government plans to improve UK infrastructure by opening up vast public network
The British government is opening up over 13,000 miles of publicly-owned digital networks in a bid to help improve access to high-speed broadband in areas of the country that are not well served by existing providers.
The government, realising the necessity of high speed internet in the modern age has pledged to spend at least £1.5 billion of taxpayers’ money on public sector networks and infrastructure each year.
Until recently the government didn’t even possess comprehensive information on the expanse of this infrastructure. It is only in recent times that the extent of it has been fully documented. Much of its capacity has simply gone to waste while public sectors built their own networks – at great expense.
Under the new scheme, the government will publish a map of public sector communications and digital infrastructure, revealing the true extent of the networks currently owned and leased by the government.
These networks include fibre that span the railway networks and motorways in the UK, as well as the high security defence network, the N3 network used by health and social care services and JANET, used by research and education institutions.
The government has said that it has the capacity to expand and improve access to high speed broadband, particularly in many rural areas that are currently undeserved.
“In some cases we may not need to build further infrastructure, or we may find we are able to use spare capacity to supplement and enhance existing provision and connectivity,” the Cabinet Office said. “We’re going to collaborate to get this done. The review has focused on central government, but there will be other networks that the government owns out there and we would like to use this opportunity to invite other public sector bodies to identify their infrastructure and contribute to extending coverage.”
“We want to take full advantage of this existing capacity, avoiding wasteful duplication when buying additional resource,” Cabinet Office minister Francis Maude and culture minister Ed Vaizey said in a joint foreword to the report.
Mortgage rate war wages
A new war is under way in Britain as banks slash their mortgage rates. The last month alone has seen a drastic fall in prices of £1,700.
New deals have been offered by Britain’s largest banks since the start of 2015 offering borrowers lower rates and reduced fees. First Direct announced Friday that it would allow home owners to lock into a fixed rate of 2.89 per cent for 10 years – the lowest offered for quite some time. This follows similar offers from banks such as HSBC and Barclays.
Families who take the opportunity to re-mortgage could save as much as £1,690 over the next five years on a £200,000 loan. Fierce competition has forced banks to engage in a price war in order to win over custom in light of indications from the Bank of England to keep interest rates low.
Brokers are suggesting that prices may fall even lower, with predictions of deals below the two per cent mark for five year deals, and as low as one per cent for two year rates.
Mark Harris, of broker SPF Private Clients said: “Lenders are keen to advance more money this year and they’re cutting their prices to attract customers. Banks will hope to make money by selling customers other products such as current accounts and credit cards.”
Another broker, Aaron Strutt, of Trinity Financial said: “For fixed rates to go below 1 per cent would be extraordinary, but that now looks likely to happen very soon.”
Other notable deals this year include a two year fixed rate from HSBC of 1.19 per cent for customers with a 40 per cent deposit, down from a previous offer of 1.29 per cent.
With an 80 per cent deposit, the cheapest two year rate has dropped from 1.98 per cent to 1.79 per cent, offered by Marsden Building Society in a decision to undercut the Post Office.
The most significant savings can be found for those with a 10 per cent deposit. Just one month ago borrowers could get a five year loan from Skipton Building Society for 3.99 per cent with a £1,055 fee. Today, the cheapest five year rate is from Norwich & Peterborough at 3.84 per cent with a £1,285 fee.
Figures from London & County show that every type of borrower taking a mortgage today will be better off than in January.
The Bank of England voted on Thursday to keep interest rates at 0.5 per cent for the 71st successive month. Economists have said that falling inflation had reduced the urgency for hikes in the rate.
How low will petrol prices fall?
As crude oil prices continue to fall, consumers are making the most of the lowest petrol prices in six years.
Tesco, Morrisons, Sainsbury’s and Asda have all slashed the price of petrol and diesel at the pump, with a garage in Birmingham being the first to break the magical £1 a litre mark.
How much further can we expect prices to fall?
Simon Williams of RAC had this to say:
The decision of three forecourts in the West Midlands to sell petrol for under £1 a litre – last seen in 2009 – is clearly having a ripple effect on the supermarkets as they are continuing to bring their prices lower still.
With a barrel of oil now costing around $47, we are surely only weeks away from the milestone price of £1 a litre being a common sight at petrol stations up and down the country.
This will also have a very positive effect on reducing the average price of both petrol and diesel for motorists everywhere.
And, as the current oversupply of oil is believed to be part of a long-term Opec strategy to keep oil prices low, there is every reason to think that motorists may well enjoy low prices for some time to come.
However, we are now getting to a point where the share that the Treasury takes from the forecourt price is nearing 75%, which is a bitter pill for motorists and retailers.
We should perhaps be seeking a commitment from all the major political parties that they will not look to increase fuel duty in the next parliament.
Quentin Wilson, motoring journalist and lead campaigner for Fair Fuel UK
I think some of the investment banks, such as Goldman Sachs, are saying that oil is likely to drop to $40 a barrel this year. We’re getting to 99p a litre at some petrol stations now.
You could say petrol prices might drop to 85p if retailers react to oil prices.
Oil has reduced in price by 58% since June, yet petrol has only gone down 50% – clearly someone in the value chain is making a profit.
There’s pressure from me with my Fair Fuel UK campaign, and George Osborne, to lower petrol prices.
It’s a classic example of the rocket and feather effect. When oil prices go up, retailers and suppliers are quick to respond and prices at the pumps rocket the next day. But when oil prices go down, petrol prices fall as slow as a feather.
Petrol retailers blame the cost of refining and so on, but it doesn’t have to be like this. In France, for example, the price of petrol varies daily.
Consumers here are being disadvantaged, someone in the chain is hanging on the profit.
David Hunter, Schneider Electric energy management specialists
If oil prices fall to $40 a barrel, then a litre could fall to £1, based on the exchange rate staying stable, though there would be a delay on that feeding through to price at the pump.
Less than that would be unsustainable because of tax take, extraction and manufacture costs.
As the price [of oil] falls, the tax and duty proportion of the pump price rises as fuel duty is unchanged.
So in July the tax/duty mix accounted for around 60% of the total forecourt price. Now it’s knocking on the door of 70%. The pound has fallen by around 12% against the dollar since the mid-July oil price peak.
So we need to compare the sterling value of Brent with the price at the pumps, as this exchange rate weakness has acted as a brake on price falls to date.
Other costs such as transport, supply costs and retail margin may vary but won’t fall by anywhere near the same degree as the commodity.
There is a time delay between movements in the unrefined crude oil market and filtering through to the pumps. The crude oil has to be sold, transported to refinery, refined and distributed to the retailer before the price effect can be seen.
The refined fuel price can also de-couple from the price of Brent crude oil due to other factors.
For instance, high levels of refinery-finished product stocks would delay the fall in the crude oil price making its way to the pump, and also demand constraints or maintenance outages at refineries.