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:

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)

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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)

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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

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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.

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July 19, 2012 What is Base Oil?

Base Oil is one of the most ubiquitous oil products in the world and can be found in literally thousands of products, many of which would be viewed as completely unrelated to the oil sector.

Firstly from a production perspective, Base Oil is one of the fractions that comes out of the Crude Distillation Unit (other refined fractions include Gasoline, Middle Distillates, Fuel Oils). It is heavier than other fractions and has a higher boiling point. This means it sinks to the bottom of the chamber and is drawn off later than the lighter products (ie, the fractions mentioned above).

The main use of Base Oil is in the manufacture of lubricants and every single lubricating oil in the world (with the exception of chemically made synthetic oils) has Base Oil as its main ingredient. So whether it is engine oils, agricultural lubes, hydraulic oils, industrial waxes or manufacturing greases, they all are made from Base Oil.

Base Oil also has two key differences to other refined products. Firstly, unlike the other fractions, it is not combusted (ignited) but is simply used as a component in the manufacture of other products. This makes it environmentally benign when compared to other crude oil products. Secondly, Base Oil is non-toxic and therefore has uses way beyond the industrial / oil sector. So ladies, next time you apply the mascara, relax in the knowledge that you are slapping Base Oil onto your face. Same with lipstick. Kids, enjoy that ice-cream or chewing gum because the thin film that covers both products (to maintain texture) comes from Base Oil. Surgeons, you’d have a lot of dead patients if it wasn’t for the base oil mixture that rapidly seals internal incisions, thus ensuring minimal blood loss and disease spread. And finally pigs, you’d have very sore backs if it wasn’t for the Base Oil that is smeared all over you to prevent sun-burn…

This month’s question came from Kyle in Taunton

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May 15, 2012 Is there a good time of the year to buy my heating oil?

Take it from us Alan, if there were good and bad times to buy oil, we would be profiting from that and not updating this website! The truth is that second guessing the oil markets is impossible – proved time and time again by “experts” who constantly get their forecasts wrong (think Goldman Sachs and others predicting in 2008 that oil would go up to $200 per barrel – it was at $40 by December 2008).

In theory, as jet fuel prices rise in the spring and summer, heating oil prices will follow and also go up (heating oil is the same product as Jet Fuel). However, if in the same period crude oil prices go down, then heating oil prices will also drop, irrespective of what happens with jet fuel. Plus, these macro (worldwide) trends do not address “micro” issues that affect heating oil prices such as local demand, delivery size, type of truck used, delivery time-windows, distance driven and a whole host of other very specific localised issues.

Perhaps the only golden rule for the purchase of heating oil is to avoid buying it in December and January. Premiums on heating oil tend to be highest at this time of the year and demand is so great, that delays in delivery can occur, particularly as Christmas approaches. There is also the issue of weather, which can make deliveries difficult, so purchasing in plenty of time before the winter (October or November) is a very sensible measure. The trade association representing the heating oil industry is the FPS and their website www.fpsonline.co.uk has lots of good advice for homeowners buying heating oil.

Alan in Oxfordshire

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