Expect volatility in petrol prices even as Russia-Ukraine conflict persists, say experts

SINGAPORE: Motorists in Singapore should expect some volatility in petrol prices in the days ahead, even as the Russia-Ukraine conflict persists, experts told CNA.

This follows local pump prices steadily rising in the month of March reaching a multi-year peak last week.

However prices have since seen a decline, mirroring that of international oil markets.

According to fuel price comparison website Fuel Kaki on Thursday afternoon (Mar 17), the most popular 95-octane grade petrol is going at a range of S$2.99 to S$3.09 a litre, down as much as 24 cents over the past week.

However, pump prices remain markedly higher than they were one month ago when 95-octane grade petrol was between S$2.75 to S$2.82 a litre.

Speaking to CNA, Dr David Broadstock, senior research fellow and head of the energy economics division at the National University of Singapore’s (NUS) Energy Studies Institute, said that international oil markets remain “fragile”.

“We can certainly expect to see some further volatility moving forward," he said. 

"Volatility, defined by sudden and extreme price movements … often occurs in reaction to market uncertainty. The current, heightened, uncertainty in oil markets is based on the events in Ukraine and which do not yet have a clear trajectory or timeline.

“In other words, the source of the uncertainty still prevails.”

Noting that the current price of oil appears to have dropped from the highs of near US$140 a barrel earlier this month, Dr Broadstock said that this suggests that the global oil supply chain is "reasonably" resilient to a reduced level of supply from Russia. 

Russia is one of the world’s top three oil producers, after the United States and Saudi Arabia.

“This price is still above long-term normals, adding further support to the idea that oil markets remain fragile,” he added.

As of Thursday 6pm, Brent crude futures stood at US$102.95 a barrel, while the US West Texas Intermediate (WTI) crude was at US$99.60 a barrel.

​​Singapore University of Social Sciences’ economist Walter Theseira noted that oil trading markets are influenced not just by current demand and supply conditions but also expectations of what may happen in the near future. 

“The problem has been that the news coming in on a daily basis is causing the market to change expectations just as often," he said.

"Since there is no clear path to stability in Ukraine, and there is also uncertainty about how other major oil suppliers will respond, the market simply swings based on whatever news appears the most important and updated at that point in time."

In addition to Russia’s invasion of Ukraine, there has also recently been news of lockdowns in China due to the resurgence of COVID-19. This, Dr Theseira said, pointed to “continuing uncertainty on many fronts” and would also dampen demand.

CIMB Private Banking economist Song Seng Wun said that it remains unclear if the downward trend in oil and pump prices over the past few days will continue.

"Factors which have drove prices up - worries over supply, the Iran nuclear talks, supply disruptions are still there. Except now, people look on the so-called the glass half full (perspective)," he said.

"It is still simply put, volatile ... It can go either way."

A "NATURAL CORRELATION"

As oil prices change, the value of the petrol sitting in tanks and the supply chain changes, said Dr Theseira. 

“It is quite normal for retail pump prices to follow market oil prices both up and down," he said. 

"Of course, the timing and extent of the change will also depend on market conditions and the supply of retail petrol … but the general trend is that oil market prices have a direct link to retail petrol prices.

“So there would be volatility at the pump price for as long as there is also uncertainty affecting the oil market.”

Given that fuel from the pumps is refined from oil, there will be a “natural correlation” between the two “complementary markets”, said Dr Broadstock.

“What impacts oil will intuitively impact petrol in a similar manner, but perhaps with some delay and usually with lower severity," he said.

"In this regard it is reasonable for consumers to be anxious when oil prices spike, as they have done in recent days, and remain high."

Petrol retailers in Singapore do not use crude oil prices in their cost accounting and pricing decisions for pump petrol. The Mean of Platts Singapore prices – the wholesale price of refined oil published by markets research firm S&P Global Platts – is used instead.

Other considerations that go into the pricing decisions of retailers include duties, the cost of storage, land and labour, as well as currency differences. There is also typically a “lag effect” given how pump prices are based on older inventories bought at either higher or lower prices depending on the market situation then.

The pass-through effects from oil to pump prices are impacted by many factors, noted Dr Broadstock.

“Expectations are certainly built into pricing mechanisms, and we can use that to position some useful trajectories," he said.

"For example, we have seen prices abruptly knocked away from their ‘normal position’ due to the onset of the crisis. Markets, presented with such unique events, often err on the side of caution, and overreact."

Dr Broadstock added: “What follows is a slower-paced process of price-discovery, as supply-chains recalibrate, and clarity forms over new fuel contracts. Ideally prices will then stabilise and converge to a steady level.

"This process is not yet complete for oil, and therefore not complete for pump prices.”

VARIOUS FACTORS IN PLAY

In response to queries by CNA, an ExxonMobil spokesperson noted that since Monday, Esso lowered its petrol prices across all grades two times.

“The prices at the pump are influenced by the price of crude, and wholesale price of products which fluctuate according to demand and supply factors – such as economic conditions and seasonal factors, fuel production, inventory levels, storage and transportation cost,” said the spokesperson.

“Besides wholesale prices, the retail prices of products are also influenced by other factors like marketing, storage, land prices, government taxes, currency exchange rates and competitive market forces.”

Shell Singapore also noted that it understood “concerns” over fuel prices.

“Various influences determine the price of automotive fuels in Singapore and changes in prices cannot be attributed to any single factor," its spokesperson said.

"Such factors include the prices of refined oil products based on the Mean of Platts Singapore, market volatility, foreign exchange, government taxes and excise duties, distribution costs and operating expenses."

“We will continue to monitor the situation and adjust our retail prices accordingly.”