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!

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Read our forum questions below:

November 25, 2011 Flicking through the business pages of a freebie commuter paper recently, I saw a number of the listed oil prices had 2 prices quoted - one was a FOB price and one was a CIF price. What is the difference?

Hats off to the paper that has these details, because when people loosely refer to the “oil” price or the “Rotterdam” price or the “wholesale” price or the “market” price, they are more often than not, referring to 2 prices; FOB and CIF.

FOB stands for Free on Board – an old trading term to indicate the price of a product from source. It is sometimes referred to as the ex-jetty price, as it indicates a price exclusive of shipping, ie, the buyer has to make their own arrangements to transport the product to their relevant market place.

CIF on the other hand, refers to Carriage, Insurance and Freight, or in other words, the price of the fuel at source (ie, FOB) plus transportation. Basically the seller is saying to the buyer, “fine you can have the product, but if you are not going to come and get it and instead, we have to transport this product to your premises, then the price will clearly be higher”.

For obvious reasons, the CIF price is usually higher than the FOB price, because CIF has to cover transport costs, on top of the FOB price. In this way, the difference between the 2 quotes is an accurate measure of shipping and insurance tariffs. If the CIF quote is much higher than the FOB quote, then transport is obviously expensive, whereas when the CIF quote is much closer to the FOB quote, then transportation elements (shipping, insurance, import tariffs) are minimal.

Final point on this is that in the main, the UK is a CIF market. This is because the source of refined oil is seen as the Antwerp – Rotterdam – Amsterdam (ARA) region. So a purchaser of oil can buy from ARA at FOB, but then has to ship this product over the North Sea to the UK, thus incurring extra (transport) costs.

This great question was asked by Michelle from Hertford

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September 7, 2011 What exactly is an arbitrage / arbitrage trading?

An arbitrage is the difference in oil price between 2 different regions. The price difference reflects variances in localised supply / demand between the 2 regions in question.

So for example, petrol might have a value of $800 per tonne in Northern Europe. However, because demand for petrol is higher in the United States, the price might be higher (say $825) and an arbitrage thus exists, even though the product in question is identical. So petrol will be shipped from European refineries over to the USA (rather than being sold in Europe), as even with shipping costs, there is still more money to be made in the USA than in Europe.

However by taking petrol out of the European market, a supply shortage is created, thus pushing the price of petrol up. Conversely in the States, a flood of product from Europe lowers the price. So the arbitrage is removed and European and US prices equalise. Another reason for arbitrages to disappear is when shipping costs rise so much (because demand has gone up as a result of the arbitrage), that the price advantage is wiped out.

Arbitrage traders will spend their time observing different geographical markets (ie, future supply situation, developing demand characteristics) in an attempt to predict and profit from future arbitrage opportunities.

A question from Alan in Glasgow

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August 2, 2011 What is Fracking (in simple terms please)?

Fracking has received its own share of controversy (banned in certain countries), although probably less so than tar sands exploration. Fracking is a process of drilling into areas that are suspected of holding reservoirs of natural gas. At the point of correct depth, a horizontal bore is drilled and (typically) a water / chemicals slurry is fired at high pressure into the bore to rupture the rock outwards and create fissures, whereby the natural gas can escape.

The main objections to fracking are environmental (ground-water contamination) and safety (underground destabilisation causing gas releases and sometimes surface-based explosions). However, the industry is young and to date, much activity has been carried out in a largely unregulated manner. With demand for “frack-gas” showing no sign of abating, legislation across the world is now catching up.

Another from Jon in Brussels

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August 1, 2011 In the last monthly report, Portland mentioned that the exploration for oil from tar sands was controversial. This seems to be the general view, but why? Also, why has it taken so long to find out that the tar sands can be used to produce oil?

This is a hot potato and will probably get the tar sands lobby on our case! But here is what we believe to be a balanced view on the subject.

The exploration for oil in the Canadian tar sands makes eminently good sense in the current economic climate. After all, every piece of analysis points to a long-term supply shortage versus crude oil demand. Therefore, any rich source of oil supply is inevitably going to be explored.

However, tar sands exploitation is a very messy business and has a fairly poor environmental track record. Giant tar lakes have historically scarred the landscape, polluting rivers, affecting fish stocks and destroying flora and fauna. Such pollution can, and should of course, be contained and increasingly, stricter controls are being enforced by the Canadian Government.

However, there is no getting away from the fact that producing oil from tar sands is tremendously energy intensive and generates significant carbon emissions – much more so than conventional exploration for oil. This is essentially because tar sands contain more impurities (tar sludge, metals, rock etc) than conventional oil and all this has to be removed through industrial processes before the product is ready for refining.

This energy intensity issue answers the second part of your question with regard the “discovery” of the tar sands oil reserves. The oil has always existed and oil companies have always known this. However, because of the energy required to extract and prepare tar sands, the cost of exploration has up until now been largely prohibitive. As a rule of thumb, the crude oil price has to be in excess of $75 per barrel for the tar sands to be commercially viable. So with prices now sitting around the $100 barrel and few analysts predicting much of a dip in this price, the tar sands are receiving serious investment and exploration.

Jon in Brussels

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July 29, 2011 Why is there still a $22+ difference between Brent and New York oil prices, and when do you think this gap will close?

This goes back to an earlier question in the forum (see Feb 2011) and our answer still holds true. The New York price you refer to is most likely West Texas Intermediate (WTI) – the marker grade for US crude sales and we believe the difference between that and Brent, looks set to stay in place for quite a while.

In the past, WTI used to command higher prices than Brent, because a) it was a sweeter crude able to produce more petrol and b) it served the largest oil market in the world, ie, the USA.
Since then, as we know, times have changed. There is no longer a premium for petrol producing crude oil grades (in fact the opposite) and the US economy is stagnant to say the least.

Furthermore, the WTI price reflects the record breaking stock levels in the States (high) that do not reflect their low demand, thus resulting in a relatively suppressed price.

Brent on the other hand produces more Jet and Diesel (the big growth grades) and serves the whole of the world outside of the States. Clearly the rest of the world market (ie, India, China, South-East Asia) is far more buoyant than the States and the Brent price reflects this.

So in a nutshell, Brent is now seen as the de facto marker grade for the world and we see the large differential as long-term.

Andrew in Suffolk

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July 22, 2011 In your answer to June's Fuel Forum question, you mention the impact of commodity speculation on oil prices. Truthfully, what is the impact of speculation? Is it greater or less than popular perception?

Using the word truthfully makes you sound like our Mums! The truth is that speculators can only ever fan the flames of a commodity boom or bust. This does not underestimate their impact, but simply means the conditions have to already exist, such that speculators can profit and therefore affect market movements. The thought that speculators can push prices up to the levels that we have seen recently, flies in the face of world economic data, ie, that demand in places like China and India is in danger of running away from supply.

A more relevant factor to note is the general access to oil markets that now exists. It was only as recently as the early 1990’s, that oil markets were the business of just a select band of oil companies. Banks weren’t on the scene, let alone hedge funds. Clearly, this was an unsustainable position and one that lent itself to accusations of price fixing and collusion. So the markets were opened up and suddenly a whole world of people who didn’t really understand the fundamentals of oil, were pumping more and more money into the market. The unintended consequences of this development were inevitable distortions in the market, that did not reflect the actual fundamentals of supply and demand. For example, the suspicion that a hedge fund will be buying $billions of forward contracts, will often have an equivalent short-term impact to an oil field closure or discovery.

So it is a complex picture, but business cemeteries are full of companies and people who thought they were bigger than the market itself. The truth is that no-one can “corner” a market as vast as oil, so in the long-run, supply and demand will remain the main price drivers.

This month’s question comes from David in Lichfield

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