CNA Explains: Crude oil prices have fallen. Will petrol prices follow?

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.