On St. Nicholas Day, we might not have received the gift of cheaper loans from the Monetary Policy Council, but a reduction in oil prices will also please drivers. Considering more people in Poland own a car than have a variable interest rate złoty loan, could it perhaps even be better news?
What happened?
On Wednesday, December 6, we witnessed another markdown of oil prices. It’s worth remembering that this commodity is traded on two primary markets: London and the USA, although it’s listed in US dollars in both. In London, Brent crude is listed, while WTI is listed in the USA. When trading this commodity from other reserves, it is usually priced with a certain correction depending on parameters such as sulfur content, in relation to one of these “types.”
Why was this markdown so important? After the falls, we ended up below the six-month lows. In the case of the London market, we were less than 4 dollars away from the March lows. If this level were to be breached, the commodity would become the cheapest it’s been for over two years, essentially back to levels significantly prior to Russia’s invasion of Ukraine. Today, the price is about 75 dollars for commodities listed in London, and crude oil in the USA is currently about 5 dollars cheaper.
The Role of the OPEC Cartel
Oil prices, like other goods, depend on changes in production and demand. The problem is that, in the case of oil, we also have the well-known OPEC cartel, which unites producers in order to regulate supplies. The cartel theoretically constitutes only about 40% of the world extraction, but it operates in consultation with other countries, such as Russia, thereby expanding its influence. The organization is critical as it adjusts the scale of production to maintain a certain price stability. This stability is obviously more about maintaining revenue consistency for the producers rather than keeping prices attractively low for consumers. The cartel is therefore much more active when market interest in purchasing the commodity decreases and they want to prevent the price from dropping too significantly. This is when more or less solid restrictions on extraction come into play, which offset any drop in demand. It’s worth noting, however, that many times these are merely declarations and actual production might vary. The budgets of many of these countries are heavily reliant on profits from oil, and while a higher price helps, lower sales are a nuisance, resulting in examples of insubordination.
What else affects prices?
The market also responds to standard stimuli. If economies slow down, demand for energy resources usually also diminishes. That’s precisely what’s happening with crude oil. Speculation about a potential slowdown in economic activity in China or Western Europe is currently significantly influencing oil prices. On the other hand, if the economy improves, it should pull prices upwards. Another key factor are military conflicts. A good example is the current situation in the Middle East. This region happens to be home to many oil-producing countries. Should the conflict escalate, it could disrupt the supply networks of this commodity. This is why, following the attack by Hamas on Israel, oil prices jumped in the markets. Currently, even with the continuation of hostilities, the price is falling. However, this does not mean that this rule doesn’t work. The reason is more likely a reduction in the likelihood of the conflict spreading to other countries.
How will this impact prices at gas stations?
We need to remember that the fuel price at the pump largely consists of taxes. The cost of the raw material, its processing, logistics, and of course, the margin are also important. Unfortunately, it is not the case that if oil becomes cheaper by 4% today, we will see a 4% markdown at the gas station tomorrow. Some taxes, such as excises, have a fixed amount and are independent of commodity prices on the markets. On the other hand, VAT as a percentage rate will drop in value along with decreases in commodity prices. There is another problem. Changes in gas station prices are unfortunately more sensitive when the commodity becomes more expensive. When prices fall, there can occasionally be a delay in seeing discounts, but that’s another story.
Author: Maciej Przygórzewski – currency expert at InternetowyKantor.pl service.
