Cost of living: Fuel prices could rise again as oil-producing states ponder output cut
There is a mounting risk that fuel prices could soon begin to rise again as major oil-producing countries ponder a big cut in output.
The Opec+ cartel, which includes Saudi Arabia and Russia among its main members, is expected by markets to reveal this week a collective target to reduce delivery by more than one million barrels per day.
The price of Brent Crude, which rose 4% on Monday in anticipation of such a cut, was up further during Tuesday’s trading – to just shy of $90 per barrel.
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Opec+ is responding to weaker demand for oil globally as economies tackle high inflation though there is pressure from the West to maintain supply to help tame the pace of price rises.
While the current Brent price remains far below the early Russia-Ukraine war highs of above $120 per barrel, the recent weakness of the pound would be expected to contribute to pressure on UK pump prices, potentially adding to the cost of living crisis again according to motoring organisation the RAC.
That is because wholesale fuel, like oil, is traded in dollars.
‘Further pain at UK pumps’
RAC fuel spokesman Simon Williams told Sky News: “The extent of the (Opec+) cuts will be crucial, as will compliance from member countries throughout October.
“But one thing’s for sure, it’s likely to cause further pain for drivers at the pumps in the UK, particularly with the pound so weak against the dollar.
“If the cost of a barrel were to climb back up to $100, drivers at the current exchange rate would very soon see forecourts displaying prices around 175p a litre again, which is 12p more than the current UK average.”
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How rising costs will affect you
Average pump prices are currently 163p for unleaded and 180p for diesel – the latter remaining higher because of the loss of Russian supplies.
The pound was infinitely higher in value versus the US currency, around the $1.25 level, when petrol and diesel costs were hitting record levels daily in the spring following the Russian invasion.
It slumped to an all-time low of $1.03 last week in the wake of the government’s mini-budget when financial markets balked at the volume of giveaways and level of borrowing required to fund the growth programme.
How the markets are performing
It had recovered to just shy of $1.14 by Tuesday morning. That has been credited to government U-turns since Kwasi Kwarteng’s statement to the Commons and a weakening in the historic level of dollar strength.
The reason cited for the weakening was data suggesting the US economy was slowing faster than expected, raising the prospect of a pause to sharp US interest rate hikes.
Stock markets also recovered some poise as investors left the safety of the dollar, with the FTSE 100 putting on 1.5% in early dealing to take the index above the 7,000 points mark.
The more domestically-focused FTSE 250 was 2% higher.
Energy and commodity stocks were among those to enjoy the best gains as prices recovered from their recent recession -induced slump.
Opec sources told the Reuters news agency that voluntary output cuts by individual members could come on top of the group production reductions.
That being the case, it would amount to the largest output reduction since the start of the COVID pandemic in early 2020.
However, there were signs that the markets were yet to fully shrug off the fallout from the mini-budget that saw UK borrowing costs soar.
There were clear concerns around the UK’s credibility when the government raised £2.5bn on the bond markets.
The 0.5% of the 2061 (40-year) gilt on offer was sold at an average yield of 3.371%.
While that was the highest yield for any gilt sold at auction since 2014, it came in below that for a 30-year green bond syndicated last week.
It drew bids worth 1.97 times the volume on offer – the lowest bid-to-cover ratio since March.
As the latest reduction in the energy price cap takes effect, households are being warned of a big lift in bills ahead due to higher wholesale gas prices.
The cap, which limits what suppliers can charge per unit of energy, fell by 7% overnight in the wake of the latest three-month review by industry regulator Ofgem.
The reduction meant that typical 12-month bills will be around £500 cheaper than a year ago.
It left the average bill at £1,568 – a figure that will apply until the result of the next review takes effect in October.
However, a report by the Energy & Climate Intelligence Unit (ECIU) said on Monday that consumers should brace for an additional hit of up to £600 over the coming winter, largely due to higher wholesale prices.
It pointed to a possible £200 price cap hike from October on the back of some analyst calculations, suggesting it was plausible the total could remain around that level until June.
One calculation, by experts at Cornwall Insight and released on Friday, predicted a 10% – or £155 – increase from 1 October to £1,723 a year but said there remained uncertainty on the market path ahead.
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Party energy plans compared
Consumer groups say there is an alternative to the price cap, pointing to a growing number of fixed-rate deals on the market following a dearth of competition in recent years.
European wholesale costs are again elevated for the time of year based on pre-energy shock norms.
Recent pressures have included strong competition from Asia, particularly China, for liquefied natural gas (LNG).
That has replaced some of the Russian natural gas volumes that were stripped away in the wake of the invasion of Ukraine in February 2022.
A planned extension of the European Union’s sanctions regime against Russia will see its LNG exports targeted for the first time – potentially placing further pressure on supply across the continent.
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UK household costs for both gas and electricity stood at an average of just below £1,090 ahead of the Russia-Ukraine war.
The ECIU report said: “By September 2025, the average household could have paid an extra £2,600 on energy bills during the ongoing gas crisis.
“With the government also spending £1,400 per home earlier in the crisis, the total extra costs could be £4,000 per home, and counting.”
Energy has been among the big battlegrounds of the election.
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The price of going green? Unions say it’s workers’ jobs
Much of the debate has centred on costs but the impact of gas use in particular has fuelled argument too on the UK’s climate commitments.
Dr Simon Cran-McGreehin, head of analysis at ECIU, said: “The UK’s high dependence on gas for electricity generation and heating has cost bill payers £2,000 so far during the gas crisis and the economy as a whole tens of billions of pounds.
“Common sense measures like investing in insulating the poorest homes, switching to electric heat pumps and fast-tracking British renewables will leave us less vulnerable to the whims of the international gas markets.
“North Sea gas output is declining so unless we make the switch we’ll be ever more dependent on foreign imports.
“The maths is clear, when it comes to energy independence, new drilling licences are a side show making a marginal difference compared to the immense quantity of homegrown energy that offshore wind and other renewables can generate.”
Read more:
EU sanctions on Russian LNG could have gone much further
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Emily Seymour, the editor of Which? Energy, said: “Consumers will be relieved to hear that the price cap is dropping by around £122 for the typical household from 1st July.”
She added: “With the price cap predicted to rise again in October, many consumers will also be wondering whether to fix their energy deal.
“There’s no ‘one size fits all’ approach but the first step is to compare your monthly payments on the price cap to any fixed deals to see what the best option is for you.
“As a rule of thumb, if you want to fix, we’d recommend looking for deals as close to the July price cap as possible, not longer than 12 months and without significant exit fees.”
The chief executive of Boots, Britain’s biggest high street pharmacy chain, is quitting after its owner’s plans for a £5bn sale or stock market listing stalled.
Sky News has learnt that Sebastian James, who has run Boots since 2018, will leave the company in November.
City sources said this weekend that he had accepted a new role in the healthcare industry.
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His exit comes soon after it emerged that New York-listed Walgreens Boots Alliance (WBA), the British retailer’s owner, had decided for the second time in two years against pursuing a sale or stock market flotation of the chain.
An announcement about Mr James’s departure is expected in the coming days.
WBA is not yet thought to have lined up a successor.
Mr James, who previously ran the electricals retailer Dixons (now named Currys), recently endorsed Sir Keir Starmer – a notable move because of his long friendship with Lord Cameron, the foreign secretary.
His departure from Boots will come during the Nottingham-based company’s 175th year.
Boots employs about 52,000 people and trades from roughly 1,900 stores.
Boots has around 1,900 stores. Pic: iStock
Its recent trading performance has been strong, with WBA this week saying that like-for-like sales at Boots during the quarter to the end of May rose by 6% and 5.8% across its retail and pharmacy operations respectively.
An insider said Mr James had overseen a successful turnaround, with market share having grown for 13 successive quarters.
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It has been a rare bright spot for WBA, which has had a torrid time and has seen its shares slump.
A WBA spokesperson said this week: “As Walgreens Boots Alliance continues a strategic review of the Company’s assets, we took a critical look at Boots.
“While we believe there is significant interest in this business at the right time, Boots’ growth, strategic strength and cashflow remain key contributors to Walgreens Boots Alliance.
“We are committed to continuing to invest in Boots UK and to find innovative ways for this business to fulfill its potential.”
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During a previous auction in 2022, only one bidder – a consortium of Apollo Global Management and Reliance Industries – tabling a formal offer worth about £5.5bn.
However, growing concerns about the global economy had triggered severe doubts among large banks which help finance leveraged buyouts, with Boots among the biggest such deals in Europe.
Among the other challenges facing prospective acquirers at the time was finding an adequate solution for Boots’ £8bn pension scheme – one of the largest private retirement funds in the UK.
This issue has now been resolved through an insurance deal struck with Legal & General.
Like many retailers, Boots had a turbulent pandemic, announcing 4,000 job cuts in 2020 as a consequence of a restructuring of its Nottingham head office and store management teams.
Shortly before the COVID pandemic, Boots earmarked about 200 of its UK stores for closure, a reflection of changing shopping habits.
Boots’ heritage dates back to John Boot opening a herbal remedies store in Nottingham in 1849.
It opened its 1000th UK store in 1933.
In 2006, Boots merged with Alliance Unichem, a drug wholesaler, with the buyout firm KKR acquiring the combined group in an £11bn deal the following year.
In 2012, Walgreens acquired a 45% stake in Alliance Boots, completing its buyout of the business two years later.
Boots declined to comment on Mr James’s exit on Saturday.
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