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The relevance (or not) of those crude oil prices

31 August, 2011
Crude oil and Platts prices are bandied about the industry but what exactly do they mean and how do they relate to you?
Page 14 

Look at any discussion about fuel prices or dealer margins and you'll find an immediate reference to crude oil prices and then, in slightly more specialist articles, a reference to Platts prices. There's a general assumption that both are so obvious and/or well understood that no further explanation is necessary. But when a commission retailer who was about to join the ranks of dealers quietly asked for an explanation of Platts pricing from an oil company representative, there was a lot of awkward fumbling for answers in plain English.

Crude Oil Prices the obvious bit (sort of)

Watch the evening news on TV and you'll often see a simple graph showing the movement of oil prices over recent weeks or months. At the time of writing, Brent Crude for delivery some eight weeks later, was priced at $109.46 per barrel. Historically $100 or higher, and we're all supposed to be concerned. Anything above $150 heralds the imminent arrival of the four horsemen of the Apocalypse!

The obvious bit is that if the crude oil price increases, the price of fuel on the forecourt is expected to rise with it. But slightly more mystifying is why the reverse doesn't seem to apply, or at least quite as quickly.

The actual oil price referred to is for a nominal barrel (42 US gallons or about 159 litres) of Brent Crude, priced in dollars. Our retailer said that as she won't be selling crude oil and won't be pricing it in dollars, it didn't seem quite as obvious as it was supposed to. And just to muddy the waters further, picturing the steel oil drums beloved of Caribbean bands doesn't help, since those have been 55 US gallons for years.

Platts who they?

Platts is a commercial reporting organisation which calculates and reports commodity prices based on commercial transactions in a number of key worldwide trading centres. It numbers thousands of commercial and government users among its clients, and those users are willing to accept Platts' pricing reports and indices as a benchmark for purchase and sale decisions and agreements. One of the key benchmarks is for refined petroleum products. At the risk of over-simplifying too much, when our industry talks of 'spot prices' or 'Rotterdam prices' it usually means the price of refined petroleum products traded in Rotterdam, which is one of the benchmark prices reported by Platts.

More importantly for our retailer, almost all dealer supply contracts today refer to the Platts reported product price as the basis for calculating the cost of the fuel delivered to her site every few days by the oil company.

The price of what?

The usual price benchmarked is that of refined product such as ultra low sulphur unleaded petrol or diesel quoted in dollars per metric tonne. Sounds simple enough (except that our retailer won't be dealing in tonnes of product), until you find that there are actually three bands of price per product: high-, mid- and low-CIF. CIF means cost, insurance and freight into the receiving country, but when using the reported price for a supply contract it's essential that the buyer and seller are both reading the correct band. Mid tends to be quoted in most fuel agreements.

How this translates into a supply price to the retailer

So let's assume we see UK diesel with a quoted mid-CIF price of $995.75 per metric tonne. Just do a bit of arithmetic and we'll have a UK price in ppl. Well yes, but that's quite a bit of arithmetic.

And before that remember that our dealer isn't buying any old generic diesel. It's coming from one of the big oil companies which will have their secret recipe of special additives and be sold under their brand. That means you'll be paying a product premium for that specific type of fuel let's say $12 per tonne, giving a product price so far of $995.75 plus $12 equalling $1,005.75 per tonne.

Then comes another volatile day-to-day variable, the exchange rate between sterling and dollars. Let's take that as 1 equals $1.64961 and use it to convert the $1,005.75 into pounds, giving 610.90 per tonne of diesel.

But as our dealer already complained, she doesn't buy or sell in tonnes so we have to convert this into something more relevant litres. The exact conversion will be a physical variable depending on the chemical content and density of the fuel. One tonne of diesel generally equates to 1,183 litres of diesel (a tonne of petrol is 1,325 litres), so we can work out the cost per litre as (610.90 x 1183) = 51.64ppl. Just a few more steps to go. Then we have to add UK excise duty, currently at 57.95ppl for diesel, giving (51.64 plus 57.95) equalling 109.59 ppl.

Then there's the oil company's own cut of the deal. To cover its marketing and distribution costs in the UK, it will have put a fixed cost over Platts into the supply deal, which for our purposes we'll say is 2ppl. So our retailer now has a price of (109.59 plus 2) = 111.59ppl as the invoiced price, which is subject to VAT at 20%.

Add the VAT of 22.32ppl and you'll find it comes to 133.91ppl. All our dealer has to do now is work out how much margin she needs and she can set a pump price.

the controversial bits

However, we've avoided one key issue here, which is the source of much discussion between different sectors of the industry timing.

Essentially it comes down to which day's value of Platts is used for the calculation, since any fuel delivered to a site today was actually produced and traded some days or even weeks earlier. So using the Platts value from 'yesterday' for today's delivery is perceived as questionable. On a deeper level, some EU politicians have started to question the very make-up of the Platts price itself. It's a subject that we don't have room to cover here, but at least now when you hear a story about crude oil prices you can perhaps dismiss it's immediate relevance to forecourt pricing.