CNA Explains: Why petrol prices will take time to fall to pre-conflict levels
Motorists should not expect to pay pre-conflict prices at the pump anytime soon, analysts say.
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SINGAPORE: Nearly four months into the Middle East war, crude oil prices have fallen from their highs as the conflict shows signs of easing.
Brent crude, the international benchmark, closed at around US$72 per barrel on Friday (Jul 3) – near to pre-conflict levels of about US$70 per barrel in late February.
But motorists here should not expect to pay significantly less at the pump anytime soon, analysts said.
Pump prices stood between S$3.36 (US$2.60) and S$3.37 per litre for 95-octane petrol across Esso, Shell, SPC, Caltex and Sinopec on Sunday, according to Price Kaki, an app by Singapore's consumer watchdog that lets users compare prices of groceries and fuel, among other items.
That is at least S$0.48 higher than the S$2.88 per litre average recorded on Feb 23, about a week before the war broke out.
For a driver refuelling a 47-litre Honda Civic fuel tank, this translates to about S$23 to S$25 more at the pump, excluding loyalty discounts.
Why do petrol prices fall slower than they rise?
This phenomenon is known as "rocket and feathers", analysts said: prices shoot up quickly when crude oil rises, but drift down slowly when it falls.
When crude prices rise sharply, higher wholesale costs feed through relatively quickly as retailers replenish inventories at higher prices, said Ms Sheana Yue, senior economist at Oxford Economics.
Shortly after the conflict broke out, supply chain disruptions pushed Brent crude to a high of US$119.40 per barrel on Mar 9. Petrol prices followed closely, increasing by as much as S$0.40 a litre in under a week, with some grades crossing S$4 a litre for the first time in years.
By contrast, when crude prices fall, retailers typically wait to see whether the decline is sustained before lowering pump prices, causing prices to fall slowly, Ms Yue said.
Since mid-March to mid-June, 95-octane fuel prices across Esso, Shell, SPC, Caltex and Sinopec have hovered between S$3.39 and S$3.49 per litre. Prices have since fallen slightly to an average of S$3.37 per litre across companies, following the US and Iran's agreement to end their war on Jun 17.
Dr David Broadstock, a partner at energy consultancy The Lantau Group, said retailers have factored in the uncertainty in oil prices and moved to a price point they believe can accommodate the ongoing risk.
“The retailers that are setting the gasoline price will primarily try to get the price close to the long-run expected price of getting hold of that gasoline, so that it can sell it and maintain a fair profit margin.
"The long-run expectation for gasoline is connected to the long-run expectation for oil, and it's very difficult to have any long-run expectation on oil at the moment,” he said.
He added that fuel customers are "quite sticky", as retailers know people will not simply stop driving. Drivers can pay more for fuel or switch to another mode of travel, though many may be reluctant to do so, he said.
“So, you have to pay the price, and the speed at which you can adjust it will probably be measured in months and years,” he said.
Diesel, on the other hand, is more closely tied to the state of the economy through business services such as delivery and logistics, and has fallen more significantly as crude oil prices dropped, he said.
As of Sunday, diesel prices per litre ranged from S$3.95 to S$4.05 across Esso, Shell, SPC, Caltex and Sinopec, according to Price Kaki, down from the peak of between S$4.32 and S$4.68 in April.
What else affects petrol prices besides crude oil?
Petrol prices are more closely linked to wholesale refined fuel prices than to crude oil itself, said Ms Yue.
“For now, movements in refined fuel prices are likely the most important driver, with crude oil prices providing only part of the picture as the relationship between crude and refined products has temporarily diverged,” she said.
Retailers' own pricing strategies also play a role.
“If I were in the position of setting prices for gasoline at the moment, I would be quite reluctant to let them go down too fast,” said Dr Broadstock, citing continued instability in the oil market as the Middle East conflict remains unresolved.
Responding to queries from CNA, Mr Doong Shiwen, general manager of Shell Mobility and Convenience Singapore, said pump prices here are shaped by a combination of factors, including global crude prices, wholesale fuel costs, taxes, transport and local market conditions.
Shell reviews its retail fuel prices regularly in response to market conditions, he added.
Esso, SPC, Caltex and Sinopec did not respond to queries from CNA.
When will petrol prices return to pre-conflict levels?
A return to pre-conflict petrol prices is possible but unlikely to happen quickly, analysts said.
Retailers have begun lowering fuel prices. Shell cut petrol prices by 4 cents a litre across all grades on Jun 19, before a further 5-cent cut across petrol grades last Thursday.
The retailer also reduced the price of diesel by 10 cents per litre on Jun 29 and again on Jul 5.
Other retailers have followed suit. As of Sunday, Caltex, Shell, Esso and Sinopec have also dropped prices to S$3.37 per litre for 95-octane fuel, while SPC dropped prices to S$3.36 per litre, according to Price Kaki.
Consumers should expect petrol prices to ease gradually rather than fall sharply, with prices likely to stay above pre-conflict levels for some time, Ms Yue said.
“Unless there is a significant increase in global oil supply or a marked slowdown in fuel demand, pump prices are likely to stay relatively elevated through the rest of the year,” she said.
She added that a return to pre-conflict levels would require geopolitical tensions to remain contained, risk premiums in oil markets to continue unwinding, and lower crude and refined fuel prices to feed through the supply chain.
“We think early 2027 is likely if these conditions are met,” she said.
Dr Broadstock said the key for consumers now is recognising that petrol prices will not shift by large margins quickly. For individuals, that could mean adjusting driving habits, or making the bigger shift from petrol to hybrid or electric vehicles.
Ultimately, oil markets and global infrastructure can absorb the impact and damage sustained, he said.
“It may take a couple of years for absolutely everything to stabilise, but it's certainly not impossible to get back to pre-conflict prices.”
