Fuel 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…
Please email us on info@portland-fuel-price-protection.com with your query. We will publish it on this page along with the best answer we can give. Please indicate on the email if you wish to remain anonymous and we will publish the question without your name.
First question comes from Sally-Anne Lewis in Northampton who asks the following question (Dec 2010):
Q: When the media refer to crude oil, they always talk about “Brent”. Why is this?
A: Historically, Brent crude was the major production grade in the North Sea and as such, became what in trading terms is called a “marker grade”. This means that when oil prices were published, rather than publishing all the different types of crude oil from the North Sea one price was published as an indicator of the value of oil in the North Sea. With the consolidation of oil trading around London and Rotterdam, Brent Crude became a marker grade for Europe and is now seen as THE benchmark crude price around the world. Clearly, our American cousins didn’t like this so created their own marker grade called WTI (West Texas Intermediate) – another type of crude, this time from the Gulf of Mexico
Bob Petersen in London asked this (Jan 2011)
Q: How many petrol stations are there in the UK and who is the biggest operator?
A: Great question! The total number of petrol stations in the UK is around 9,000, down from about 20,000 in 1990. BP have the most branded sites in the UK with 1,175 sites, followed by Texaco (1,030) and then Shell (925). It is worth bearing in mind that BP and the others do not necessarily own all of their sites and more often than not, sites are known as “Dealer Sites”, whereby small businesses agree to buy all of their fuel from (eg, BP) in exchange for branding the site (eg) in BP livery.
Fairly promptly, Bob emailed back (Jan 2011)
Q: How much petrol and diesel is sold through those 9,000 petrol stations every year?
A: Total sales of petrol in the UK amounts to 23,850,000,000 litres and 24,850,000,000 litres of diesel. Remember that not all diesel is sold via petrol forecourts, as many bulk users of diesel (hauliers, bus companies etc) have their own tankage. However, to put these volumes into perspective, 48,700,000,000 litres equates to 1.4m petrol tanker deliveries per annum!
Joe from York sent this from his Blackberry (Jan 2011)
Q: Who is the devastatingly handsome Sales Manager and how can I meet him?
A: As you know Joe, the devastatingly handsome Sales Manager is you and I suggest you get back to work and / or the sunbed.
A question from Robert Dale in Gateshead (Jan 2011):
Q: What is the difference between Gasoil (Red Diesel) and Diesel?
A: There is no major difference between Gasoil and Diesel. Indeed, this is the reason that red-dye is added to Gasoil by Customs & Excise (HMRC), to stop consumers using it in their normal Diesel cars. If caught using Red Diesel, drivers can face hefty fines and sometimes a custodial sentence – HMRC take these things very seriously.
From a technical spec, the only difference between Gasoil and Diesel is the sulphur content. Gasoil can contain up to 0.1% sulphur content, while Diesel can only contain 0.001% sulphur. As such, Gasoil has a lower production spec and costs circa 1ppl less than Diesel in the markets. However, it is only when you factor in the difference in Government tax (called fuel duty) for each grade, that the real difference in price can be seen. Gasoil duty is 11.33ppl, whilst Diesel is 58.95ppl. All in, a difference of circa 48ppl for the same product!
NB: The duty rates were correct at the time of answering but have subsequently changed on the 23rd March 2011 to 11.14ppl for Gasoil and 57.95ppl for Diesel.
A question from Douglas in Hackney (Feb 2011).
Q: Why is there such a difference in price between Brent Crude and West Texas Intermediate (WTI)?
A: Technically speaking, Brent crude is able to produce greater amounts of diesel and jet fuel, which have greater world-wide demand than the petrol rich WTI. Nonetheless, both grades should show a similar price, as they are both used as markers for world crude prices. Increasingly though, WTI is becoming an indicator only of North American markets and in particular, the record high inventory position at Cushing Pipeline Terminal in Oklahoma. The reasons for these high stock levels are myriad, but the sagging US economy, limited pipeline access out of Cushing and a wish by the US Petroleum Reserve to build strategic stock all play their part. Brent on the other hand, reflects booming oil demand outside of the US. In addition, physical supply is not limited by any landlocked oil terminal and the product index has been well marketed by London’s Petroleum Exchange, so that it really has no serious competitor on world oil markets.
Duncan from Truro asked the following question (Mar 2011):
Q: Why is oil traded in tonnes and not litres?
A: This question takes us back to the old science teacher question; “what is heavier - a tonne of lead or a tonne of feathers?”. The answer of course is that they are both the same weight. After all, a tonne is a tonne – it’s just you need a lot more feathers to make up a tonne than you do lead! So fuel is traded on the same basis, because all grades of fuel have differing weights (ie, density). For example, petrol is lighter than jet fuel, which in turn is lighter than diesel, which is lighter than bitumen and so on. So when a trader buys 10,000 tonnes of fuel he or she knows that they will receive a consistent weight of product, irrespective of how many litres makes up that tonnage. In addition, there is another practical reason as to why oil is traded in tonnes and that is that liquids contract when they cool. So if a buyer in Sweden buys 10m litres of petrol from the south of France, loads it onto a ship and then sails it to the cooler climate of Stockholm, the product will have contracted by the time it arrives. Consequently, the buyer will receive less than the 10m litres purchased. However, if the buyer has bought the product in tonnes, 10,000 tonnes of petrol in the Mediterranean will still be 10,000 tonnes of petrol by the time it arrives in the Baltic, meaning that on paper at least, the buyer has not lost any of the volume purchased.
April’s question comes from Damien in Hale, Manchester.
Q: A work colleague told me that America produces more Crude Oil than Saudi Arabia. Surely this cannot be correct?
A: Your colleague is correct - allow him / her an extra visit to the office biscuit tin. America does produce more oil than Saudi Arabia, but it is also uses more oil than Saudi by a huge factor. Therefore, the US not only produces huge amounts of oil for its own consumption, but also heaviliy relies on imports, most notably from Saudi Arablia. So Saudi Arablia is actually the biggest exporter of oil in the world, but not the biggest producer. Saudi’s large exports are in part a result of its huge reserves, but equally a function of its low population / low internal demand. So credit to your colleague, but perhaps you could snap the biscuit tin shut on his / her fingers with this fact; Russia is the biggest oil producer in the world and this is illustrated on the attached graph. Also interesting to note on the graph is just how reliant China is on foreign imports of oil (far more reliant than the US) - they consume almost 10 times the amount of oil as they produce.
From Finley in sunny Cornwall, comes the following question (Jun 2011)
Q: I was really interested to read May's Oil Market Report (link) and see the biggest drops in diesel price over the last 20 years. Do you have a similar graph, showing the biggest movements in price either up or down?
A: Your wish is our command Finley. The attached graph showing the biggest movements in the price of diesel in the last 20 years. Readers of the May report will once again note that all the biggest movements have occurred in the last 10 years. As the May report stated, much of this is due to the high price of fuel, which means that swings in price have higher absolute values (ie, a 10% movement on 20ppl is 2ppl, whereas at 50ppl the same swing is worth 5ppl). However, the fact that the boom in commodity speculation coincides with this last 10 year period, does little to remove the suspicions of conspiracy theorists who feel that market manipulation is behind fuel price volatility.
The other interesting point to note from the graph is not so much what it shows, but the events that fail to feature. Traditionally viewed “game-changing” price shifts, such as those following 9/11, do not even make an appearance. Nor does the first or second Gulf War, or indeed the “massive increases” post Hurricane Katrina (as the press at the time reported them). It is a strange world indeed when “tension on the Iraq-Turkey border”, impacts the oil markets more than an event that knocked out 40% of the US’s oil production capacity.
This month’s question comes from David in Lichfield (Jul 2011)
Q: 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?
A: 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.
Our latest questions come from Mark in London and Andrew in Suffolk (July 2011). Mark (genuinely) asked the following:
Q: Of the 9,000 petrol stations in the UK, what percentage sell Tunnock’s Tea Cakes? And does Portland believe regulation should be introduced to make their sale mandatory across all forecourts?
A: We couldn’t say this was an area of particular expertise for us Mark, but we have contacted the British Federation of Teacake Retailers and they don’t exist. So we can only surmise that Tunnock’s Teacakes (or equivalent) can be purchased at all petrol retail sites in the UK. With regard regulation, we generally oppose red-tape and feel that forcing tea-cake sales might take the biscuit (…sorry!).
Whilst Andrew asked a slightly more serious question (apologies Mark):
Q: Why is there still a $22+ difference between Brent and New York oil prices, and when do you think this gap will close?
A: 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.
2 questions came this month (Aug 11) from Jon in Brussels.
Q: 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?
A: 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.
Q: And the second question, what is Fracking (in simple terms please)
A: 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.
A question from Alan in Glasgow (Sep 11)
Q: What exactly is an arbitrage / arbitrage trading?
A: 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.
Michelle from Hertford has this great question (Nov 11)
Q: 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?
A: 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.
Michelle from Hertford has got in back in touch with this supplementary question (Dec 11)
Q: In your response to my question about FOB and CIF, I noted that you said “the CIF price is usually higher than the FOB price”. Surely the CIF price is always higher than the FOB price, because it has transport costs included?
A: You need to come and work with us Michelle. You are really getting into the nitty-gritty on this one!
Logically you are right of course. How can a price that includes transport ever be lower than a price that doesn’t? If that was the case, transport would need to be a minus cost and whilst freight margins are tight, they are not that tight!
However, the premise above is working on a built up cost basis (ie, Product Cost + Transport Cost) and it does not take into account of demand factors. So for example, if every wholesale buyer in Europe wanted to pick up product ex-jetty (FOB) rather than have the product delivered (CIF), then the FOB price would go up. At the same time, the value of CIF product would go down.
This scenario might be a function of buyers in a particular week having their own (in-house) transport, thus doing away with the requirement for CIF (delivered-in) price quotations. Or perhaps the result of major overseas buyers, looking for product to pick up by ship for export outside of Europe.
All of that being said, it is still an extremely rare event for a FOB price to be equivalent to a CIF price, let alone above it.
This month’s question is a straight-forward one from Philip in Newport, Shropshire (Dec 11)
Q: What is the total amount of sales of Red Diesel (Gasoil) in the UK per annum?
A: Annual Red Diesel (Gasoil) sales in the UK amount to circa 5.5 million tonnes. That equates to 6,500,000,000 (6.5 billion) litres.
As an interesting aside to this question, many fuel consumers are unaware that Gasoil is in fact the same grade as normal Diesel - the only specification difference being the red dye that the taxman puts into Gasoil to show that it cannot be used for road transport. On the other hand the price difference between the 2 grades is vast. Duty on Diesel as we know is 57.95 pence per litre (ppl), whilst on Gasoil it is only 11.14 ppl. This makes for a tempting diesel alternative (ie, circa 45ppl cheaper) but don’t even think about it – HMRC (Her Majesty’s Revenue & Customs) fines for misuse of Gasoil are huge.
Early in the new year (Jan 12), John from Southend asked this question:
Q: How is the pre-tax diesel pence per litre price calculated?
A: Wotcha John, roll out the barrel, how’s ya father, Shaaaaat uppp and the only way is Essex. There - we’ve got all our Southend stereotypes out of the way in one sentence. How’s the Westcliff Casino BTW? Many happy memories...
This is a good question on how diesel is priced and a subject that probably causes more confusion amongst the general public than any other.
If we go from the top downwards and take the current forecourt price for diesel which is circa £1.40 per litre (or in pence per litre = 140ppl). From that, we have to deduct VAT, which is circa 20ppl. Then another Government tax has to be removed which is called duty (currently at 58ppl). This leaves us around 62ppl for diesel exclusive of tax. As the forecourt retailer will be looking for a gross profit of about 5ppl, this takes us down to circa 57ppl and this price is the European Wholesale Price. So shocking fact No 1, is that Government tax on diesel is one and a half times the actual value of the product!
The action now moves over to Antwerp - Rotterdam - Amsterdam (sometimes incorrectly abbreviated to “the Rotterdam Market”), where cargoes of diesel are traded daily. A cargo trade is defined as a sale from a refiner (or storage terminal) to a trader’s ship and the minimum volume for a cargo sale is typically 15ml (ie, 15,000,000 litres). Every day these cargo trades are recorded and published in US $. That figure is converted to pence per litre using the day’s exchange rate and that figure is the European Wholesale Price.
This month’s question comes from Fergus in Ballymena, NI
Q: Hi there. I take home heating oil to heat my house and I have noticed that the invoice refers to 28s Burning Oil. What does this mean?
A: Thanks for the question Fergus. “28s Burning Oil” is the old / traditional name for home heating oil. It is actually exactly the same grade of fuel as aviation turbine fuel (Jet Fuel), ie, the stuff that goes into aeroplanes! In fact, the only difference between what jumbo jets use and what goes into your boiler at home, is that the latter has a pale yellow dye, to identify it as domestic / non-transportation use only.
The “28s” (28 seconds) term refers to the fantastically archaic test that was historically used to measure the viscosity of fuel products. Viscosity is essentially the pouring characteristics of liquid fuel - “pourability” would be a better term, but we don’t think it’s a word! Anyhow, using a Redwood Viscometer, the fuel is poured through a narrow hole (less than 3mm in diameter). The time it takes 50ml to pour through the hole is the “second” measurement. So Kerosene is a 28 second fluid, whereas the slightly heavier Gasoil (Red Diesel) is sometimes called “35 second oil”, because it takes 7 seconds longer than Kerosene to flow through the same hole.
That such tests were ever invented boggles the mind, but we assume people just had more time in those days...
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