The energy market continued to closely monitor the geopolitical landscape in the Middle East and its impact on oil supply during February, which, alongside an uncertain demand sentiment, caused Brent crude to rise by almost US$5 per barrel throughout the month.
The first day of February saw Brent decline by a significant US$3 to trade at US$78.7 per barrel, after closing January at US$81.7, caused by defusing Middle East tensions with a potential ceasefire between Israel and Hamas after progress in negotiations, although that did not materialise.
On the supply side, a series of outages in US refineries exacerbated supply concerns caused by Red Sea attacks.
Additionally, after a record sale of Strategic Petroleum Reserve oil in 2022, the Biden administration is slowly replenishing the emergency supplies, purchasing 23.08 million barrels of domestically produced crude oil since the sales and a further three million barrels for delivery in August.
Moreover, OPEC+ proposed no changes to oil output plans, and Aramco’s Chief Financial Officer Ziad Al-Murshed remarked that spare production capacity is around 3% of global daily demand, suggesting that supply is sufficient and balanced.
An Energy Information Administration report indicated a weak demand sentiment, showing a 12 million-barrel rise in US crude inventories mid-month. However, China’s economic recovery appeared increasingly optimistic and raised demand hopes after travel and spending surpassed pre-COVID-19 levels during the Lunar New Year.
According to the latest forecasts by Standard Chartered and JP Morgan, based on tightening market conditions, Brent crude could surpass US$90 per barrel by May. Throughout February, it rose from just under US$79 per barrel to almost US$84, climbing at month-end. Despite a similar trajectory, delivered-in diesel prices declined from 117ppl to 116ppl across February according to Portland Pricing’s index, steadying towards month-end.
GBP had a minimal impact on UK diesel prices, depreciating marginally from US$1.268 to US$1.265 against USD in February, despite falling to US$1.255 mid-month. The Bank of England held interest rates at a 16-year high of 5.25% for the fourth consecutive time, but Governor Andrew Bailey stated that rates would be reviewed after core inflation remained at 4%, near the central bank’s 2% target.
Swati Dhingra, an external Bank of England member, suggested that the central bank underestimates the downside risks of high interest rates on the economy. The Office for National Statistics revealed that the UK economy officially entered a recession at the end of 2023, with gross domestic product contracting by 0.1% and 0.3% in quarters three and four, respectively. However, the recession is expected to be shallow, and data highlighted an improved economic outlook with surging private sector activity and strong retail sales.
Furthermore, the cost to blend biodiesel (traditionally using methyl ester bioproduct) to the UK standard of 7% biodiesel (B7 specification) remained low at just 3ppl, which also helped to prevent commercial bulk diesel prices from rising.
Finally, wholesale renewable diesel (HVO) prices declined from c. 124ppl to c.120ppl. The price of Renewable Transport Fuel Certificates (RTFCs) fell marginally from 16ppl to 15ppl, slightly decreasing the benefit that HVO consumers receive.
As diesel prices declined by just 1ppl compared to HVO falling by 4ppl, the differential between the wholesale renewable diesel price and the delivered-in diesel price continued to narrow in February. Despite that, this comparison is based on wholesale HVO prices and therefore excludes any additional premiums; the assumption is also made that 100% of the RTFC benefit is passed onto the end-user.
Portland Pricing is a specialist provider of transparent, independent fuel price information, covering both traditional and alternative fuels. For more information visit its website.
