The UK historically hasn’t used oil as a major source of energy generation, instead relying on coal and gas generation in terms of fossil fuel baseload, and increasingly on renewables to provide cleaner energy. However, oil prices continue to influence global energy markets, primarily as an indicator of subsequent gas market movement, which tend to follow oil markets with a slight lag.
Movements in the oil market on average translate into a 25% change in natural gas prices. With rising oil prices also impacting on other costs, including transportation and logistics, it can be beneficial for a business to understand how the often-volatile oil market can impact on costs.
Oil is produced around the world, but the majority of global prices are set using two benchmarks. For European production as well as around two-thirds of the world’s internationally traded crude oil supplies, prices are set using the Brent Crude benchmark. For North American production, oil prices are set using West Texas Intermediate, typically referred to as WTI.
Both Brent and WTI are light, sweet crudes. Light refers to a low viscosity, allowing it to flow easily at room temperature. Sweet refers to a sulphur content of less than 0.5%, most suited to being processed into petrol and diesel. Brent oil historically was drawn from the British Brent oil field, but the field is now largely depleted and is in the process of being decommissioned.
Oil prices have always been volatile, with a major crash in 2008 following the financial crisis seeing oil collapse from $134/bbl to just $32. Prices recovered to around $100/bbl, before collapsing again to $26 during the 2010s on the back of a global oil glut. After climbing again in 2018, global COVID-19 lockdowns saw Brent fall to $20 a barrel. Prices are now trending back upwards, clearing $84/bbl in November 2021.
Oil markets provide a focused insight into how volatile global energy markets can be, impacting significantly on wholesale gas and electricity prices in the process. Ultimately, the best way for an organisation to insulate themselves from the volatility of the wholesale oil market is to reduce reliance on oil, and gas, as much as possible, through the introduction of EV fleets, on-site generation and battery storage.