Pricing

The price of crude oil and refined products, like those of other goods and services, reflect both the product's underlying cost as well as market conditions at all stages of production and distribution. The pre-tax price of any refined oil product reflects:

• Cost of the crude oil grade
• Transportation from producing field to refinery
• Processing that crude oil grade into refined products
• Transportation from the refinery to the consuming market
• Transportation, storage and distribution between the distribution centre and the retail outlets
• Market conditions at each stage along the way, and in the local market

The price of crude oil, the raw material from which petroleum products are made, is established by the supply and demand conditions in the global market overall, and more particularly, in the main refining centres: Singapore, Northwest Europe, and the US Gulf Coast.  The crude oil price forms a baseline for product prices in those regions. (See also Price Trends section).

Seasonal swings are also an important underlying influence in the supply/demand balance, and hence in price fluctuations.  Other things being equal, crude oil markets would tend to be stronger in the fourth quarter (the high demand quarter on a global basis, where demand is boosted both by cold weather and by stock building) and weaker in the late winter as global demand falls with warmer weather.

As a practical matter, however, crude oil prices reflect more than just these seasonal factors; they are subject to a host of other influences.  Likewise, product prices tend to be highest relative to crude as they move into their high demand season -- late spring for petrol, late autumn for heating oil.  The seasonal pattern in actual product prices, again, may be less obvious, because so many other factors are at work.

The overall supply picture is of course also influenced by the level of inventories. When stocks in a given market are high they represent incremental supply immediately available, so prices tend to be weak.  The opposite is true in a low stock situation.

Price change patterns can vary between regions, depending on the prevailing supply/demand conditions in the regional market, especially in the short-term.   Refinery outages or logistics problems in Chicago will lead to rapid price increases in the Midwest without matching increases on the East Coast.  Both geography and the unique quality of the petrol required by various governments contribute to the volatility of petrol prices. Sources for additional supply are limited and distant, so any unusual increase in demand or reduction in supply gets a large price response in the market.

That price response, and the differences in regional price movements, are critical to the way the oil market redistributes products to re-balance after an upheaval.  The price increase in one area calls forward additional supplies.  They may also be augmented by increased output from refineries.  The volume and source of the relief supplies are interwoven. The farther away the necessary relief supplies are, the higher and longer the likely price spike.