The cost of UK delivered-in diesel saw a stable month in May, declining marginally from c.112ppl to c.111ppl according to Portland’s national average price.
Analysis of central banks’ monetary policy dominated discourse around energy markets, as investors looked for an indication of demand for the rest of 2024. Geopolitical developments and supply concerns found stubborn resistance in growing sentiment that higher interest rates will be in place for longer than previously anticipated, slowing the growth of the global economy to control inflation.
At the beginning of the month, news that OPEC+ members had exceeded voluntary cuts in April by almost 600,000 barrels per day pressured prices, adding to concerns around oversupply as production from outside the group has risen to record levels.
The US Department of Energy also announced that it is to sell a million barrels of gasoline from its strategic reserves to lower prices and close the reserve – with President Biden keen to keep prices as low as possible during an election campaign.
On the demand side, the outlook was boosted by China announcing that it was to begin a US$138 billion ultra-long sovereign bond sale in a bid to boost its economy. The economic recovery of the world’s largest importer of crude oil has been disappointing post-pandemic. However, data released in May showed a 5.5% increase in crude imports year-on-year in April, boosting prices.
On the other hand, persistently high interest rates further weakened the demand picture. United States Federal Reserve members indicated a more hawkish stance, stating that they would only consider cutting rates after inflation is observed at an “acceptable level” for an “extended period of time”.
Furthermore, US GDP figures for Q1 were revised down from 1.6% growth (already below expectations) to 1.3%, pressuring prices.
The pound saw a positive month against the US dollar, beginning the month at US$1.249 and posting consistent gains to finish May trading at US$1.273 in the first monthly rise since January.
Although Bank of England Governor Andrew Bailey said he was “optimistic things were moving in the right direction” on inflation, April’s figure of 2.3% remained above the Bank’s 2% target, pushing back expectations of a rate cut.
Announcement by Rishi Sunak of a general election on 4 July also boosted sterling. Markets now expect an interest rate cut in September at the earliest due to previous allegations of political interference from the Bank of England, causing it to delay its decision. GBP’s rise from US$1.249 to US$1.273 equates to a 1ppl cut in the cost of diesel to the UK end user.
The cost to blend biodiesel to UK B7 specification increased, from 5ppl at the beginning of the month, to 6ppl. Whereas wholesale diesel decreased slightly during the month, FAME-10 increased from the beginning of May, widening the differential and increasing the cost of RTFO compliance.
Finally, wholesale renewable diesel (HVO) prices fell from c.121ppl to c.109ppl in May. In addition to a wholesale cost reduction, the price of Renewable Transport Fuel Certificates (RTFCs) rose to 20ppl, increasing the benefit that HVO consumers receive (assuming 100% of the RTFC benefit is passed onto the end-user).
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