Diesel Prices

Hi Willem

An active futures market exists for crude oil, so the price by default is set by market forces. The market is a combination of producers, consumers, and speculators. The latter group have been servereley curtailed by legislation in the US recently and the recent fall in the price of crude oil has a lot to do with this development. You could argue that organisations such as OPEC can influence future pricing by changing the amount its member countries produce. Another recent development that will affect crude oil pricing is the spat between Georgia and Russia. A major oil pipeline runs through Georgia and this may create supply issues if the fighting escalates.

Refiners manufacture petroleum products from crude oil and the difference in price between the crude price and the refined product is called the ‘crack’ or refiners margin. A refiner could be associated with oil production and examples include Exxon-Mobil, Shell and BP. Others such as Caltex are refiners only. Although Caltex’s largest shareholder is Chevron, who is an oil producer. The refined product is sold to re-sellers such as Woolworth’s or through the refiners own network such as Caltex. There isn’t a charge back to the oil companies for refining.

You are right when you say there are the taxes, shipping and insurance costs, local transportation costs, and then a wholesale margin at the terminal gate. Finally, the service station owner will want to make a retail margin to pay his bills. The largest single add on to the ‘raw’ price is the government excise and GST charges.

Cheers..

Hi PAul

I'm not familiar with the comment you refer to; however Singapore Gasoil remains the regions benchmark for referencing pricing.

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I should add that Singapore Gasoil is 0.5% Sulphur whilst the stuff we get at the pump is .005%, so there is a basis risk between the benchmark and what we buy. There are times when the 'spread' between the specifications changes (widens and narrows). The spread is not always transparent and more difficult to identify in 'price discovery'. However, when undertaking hedging consumers (transport & mining companies etc) hedge Singapore Gasoil.

Most (if not all) commercial contracts for the supply of diesel to consumers in Australia are referenced to Singapore Gasoil 0.5%

One of the issues the regularly comes up these days..why is diesel more expensive than ULP and one of the reasons is that it is now refined to a much lower sulphur content. This has added to the refining cost.

How does sulfur refining DOUBLE the difference.
I remember 15 - 20 years ago, diesel was HALF the price of Super & ULP, in fact, it was just a little over the same price as gas.

The truth is, demand is higher, and THAT makes the greedy oil companies bump up the price.

It is a good question. The answer in part is due to the fact that diesel is only one product that a refinery produces and refining capacity globally is extremely tight. Diesel is also the choice of industry and there has been huge demand for the product especially in developing countries.

Diesel is now produced with lower sulphur content than previously, consequently the cost of refining it has gone up. Also, retail sales of diesel in Australia are nominal in terms of overall fuel sales and it is a reality that it does not attract the same level of retail discounting that ULP does.

Nothing to do with refing costs more to do with world demand and shortage of supply. Simple economics coupled with supply and demand. Not to hard to figure is it!

Thats an old furfy...he basic percentage of refinement is 20% of each barrel of crude produces diesel.

Diesel requires a significant amount of refinement but DEMAND has pushed the price up. China, UK (huge move to diesel powered vehicles) Aust mining industry all pushed the demand for diesel up and hence...higher prices.

Matt.

"Diesel requires a significant amount of refinement ..."

Diesel is a straight cut off the Crude Distillation process.
At Caltex the process is that the cloud and Flash points are mainly achieved during that initial distillation.
The distilled diesel is then further processed on another unit to remove sulphur and add a lubricity additive to help protect the seals on old fuel pumps.
So are 2 process unit involved to providing marketable diesel.

Petrol is composed of many products. After distillation to get the base stocks, these are fed to various other units for treatment.
The products are then blended into the various qualities of petrol, dyed and sent to market
The components of petrol are far more extensively refined, but the overall yield per barrel is greater than the yield of diesel.

Hi Quebert

It is a claim that is often made, but it isn’t necessarily supported by the facts. I could demonstrate an equal number of times when the price of oil has gone up overnight, but the price of fuel at the bowser has gone down and vice versa. This indicates that there isn’t a strong correlation between overnight movements in the price of oil and the price of fuel at the bowser the next day.

Over time movements in the price of oil will impact the price we pay for fuel at the bowser, but there is a lag in between. And the price of fuel is also more complex than just looking at the price of a barrel of oil.

This post was about demonstrating the currency affect on the price of diesel fuel. For example, over the time period from the high in the price on the underlying Singapore benchmark on July 3 to August 11 the price of diesel in US$ terms had fallen by 26.2%, but in Au$ terms by only 19.9%.

Cheers….