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Oil price rises on OPEC cuts

opec logoIt’s been a frustrating few months.

The media narrative has been one of collapsing wholesale energy prices driven by a fundamental misunderstanding of the influence that the oil market has on UK gas and electricity prices.

That through separate influences the wholesale price of electricity and gas fell considerably through to mid January 2015 is not in doubt, however the confusion sowed by media and commentators alike, suggesting a new era of cheap energy and a cascade downwards of supplier pricing was always seriously misplaced and seriously unhelpful.

The facts have always been quite different. But rising above the hyperbole has been a huge challenge, a challenge many businesses have failed, being seduced by unfulfillable price promises many companies have missed the opportunity to lock in all time price lows in the forlorn hope that future falls were on the horizon.

They aren’t and never were.

Over the last 5 years the wholesale price of gas and electricity has fallen by 35%

Yet over the same period the cost of the other elements that make up the retail price has increased by 55%.

As we’ve said before what the market takes away, the government and networks soon add back in, and then some.

But refocusing on oil for a moment, and despite needing to caveat that it doesn’t have a direct or influential bearing on the cost of electricity and gas the oil price is again on the rise.

Why? Because OPEC has cut its global production forecast for 2015.

The biggest influencer of global oil process has revised its production figures down by 33% to 850,000 barrels per day.

In announcing the cut, OPEC, have tacitly acknowledged that their long term strategy of low prices rendering uneconomic the market threat from US shale and non-OPEC supply through OPEC over supply has begun to take hold:

“[Lower non-Opec supply is] mainly due to announced capital expenditures cuts for 2015 on the part of international oil companies, as well as a decline in the number of active drilling rigs in the US and Canada”

The oil price, that had been below $48 quickly rose to above $58 per barrel.

It is forecast that US shale companies require a price level of $80 a barrel to break even and as a result OPEC has plenty of headroom to raise prices before bringing the competition back into play.

So with the oil price rising, the headlines should start to reflect this, but even if they don’t the first point of impact will be felt at the pumps.

Simon Williams an RAC spokesman admitted the impact was already being felt:

“We have seen wholesale prices drifting back up and we will see increases in petrol price if this continues.”

Whilst Luke Bosdet of the AA revealed there had been examples of “confrontations between petrol station attendants and consumers challenging the fairness of rapidly changing prices”.

And that evidence existed of drivers topping up tanks by the “bare minimum in the mornings, in the hope of returning later in the day to take advantage of further price falls”.

Perhaps our experience of the year to date hasn’t been so bad after all.

The lesson? If you could have fixed your petrol prices at their lows for the next five years, why would you not do the same with your energy prices.

The difference? You can’t with petrol, you can with gas and electricity.

Dealing in reality, not hope makes far more sense.