Another month, another Prime Minister. Even during the final season of the year, the soap opera of 2022 still has a few twists in its storyline to give us. Returning character, Rishi Sunak, has quickly made his mark whilst key protagonists, OPEC+, made moves to protect their future income. Here we’ll recap events which impacted fuel prices in October and make our predictions for the coming month.
The not-so-big production cut
Following speculation in September, OPEC+ announced in early October that they would be cutting production from November by 2mbpd, roughly 2% of global supply. The announcement was driven by OPEC+’s forecasting which predicts a drop in demand during 2023. When demand unexpectedly dropped due to covid, OPEC+ was left with an oversupply leading to a substantial drop in price. OPEC+ are keen to maintain the current oil price and avoid a drop in revenue, so took the step to cut production now to ensure history did not repeat itself.
The markets did of course react to this announcement with a steep increase in price. However, it has been pointed out that OPEC+ were already underproducing against current targets so the actual drop in production is nearer half of that announced.
A blast from the recent past
After a tumultuous 50 days, Liz Truss became the shortest-serving UK Prime Minister. As discussed last month, Truss oversaw a mini-budget which rocked the market sending the pound crashing against the dollar. After a brief but largely predictable leadership contest, Rishi Sunak, former Chancellor, took the helm and immediately ditched the majority of decisions Truss had made which hadn’t already been u-turned by Truss herself.
The pound recovered to pre mini budget levels but remains stubbornly below levels seen at the start of the year due to the high level of inflation currently being experienced by the UK. This improvement has helped mitigate other impacts but not enough to actually lower the price during October.
The China subplot
Whilst storylines based closer to home will always generate more interest in British papers, the Chinese economy is always one worth looking in on from time to time in relation to fuel prices. China’s demand tends to dominate fuel forecasts and so has a direct impact on oil production levels and prices.
Although substantially lower at 2.8%, China’s inflation is at its highest since April 2020. Unlike the UK and most of Europe, China has taken the decision to maintain, rather than increase, interest rates to keep stimulating growth. However, keen to achieve “zero covid” the government has also placed millions of citizens back in lockdown, stifling productivity and adding to the drop in demand.
Across Europe and the East coast of the United States, in particular, there are concerns over a shortage of diesel reserves. Under EU legislation (maintained following Brexit), the UK is required to hold 67.5 days of domestic net consumption. The UK reserves are currently robust with over 200 days of net imports in stock1. However, even with the UK reserves, the shortages in other countries could push up costs further as oil is priced globally and purchased in dollars. In December the EU ban on Russian crude oil comes into effect. A further ban on refined products takes effect next February. These changes are likely to put more pressure on depleted stocks, driving prices up further.
Reviewing RFC’s October prediction
Last month we predicted that overall prices would remain flat but would swing wildly from week to week. Whilst that was mostly the case in the latter half of the month, the OPEC decision in the first week of October caused a large increase in price which was never fully compensated by later decreases. As such, the price we use to set our weekly prices ends October approximately 10p higher than it started.
Our November prediction
With a (hopefully) more stable and market-friendly Prime Minister, the strength of the pound is expected to remain stable. Further improvements are likely to be limited until inflation rates start to fall.
No further changes in production are expected from OPEC+ following the cut announcement, so here again, we should benefit from some stability for November.
The two factors which could cause prices to rise – the war in Ukraine and the diesel shortages across Europe and the US – are unfortunately the most unpredictable factors. As we move into a time of peak demand the likelihood is that prices will creep up further, but we are less likely to see the huge swings which have dominated the news in 2022.
Of course, this is just our opinion so for once, we may not be right!
- Fact taken from commentary within “Stocks of petroleum (ET 3.11 - monthly)”