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May Newsletter 2018: Oil Market Review

As you may be aware the oil prices have surged in the past few weeks. We wish to share with you some insights on the oil price and how it may affect your electricity bill.

Oil prices were mainly supported by the possibility of Trump pulling the US out of the JCPOA and re-instating sanctions on Iran in April. This became reality on the 8th of May and provided further upward pressure on oil prices as there is a distinct possibility that the new sanctions will hinder OPEC’s 2nd largest oil producer’s ability to market their crude, hence restricting global supply. The on-going conflict between Iran and Israel has been keeping the market on its toes and risk premium within prices as well. The exact details of the sanctions are uncertain, and these will shed light on how much, if any, of the 3.8 million barrels a day of Iranian production will be affected. The re-election of President Maduro in Venezuela does not help the country’s ailing economy nor it’s oil production which has fallen 400 thousand barrels a day since 2017 and seems like it will restrict global supply further.

As we enter the northern hemisphere summer, and hence the peak driving season within the US, US gasoline demand might shed some light on if demand erosion is happening as oil prices rally to 3-year highs. While drivers mourn the rising petrol prices, the US Shale machine continues to power on as higher prices invigorates the US shale industry. The EIA is predicting that the US will become the world’s largest crude producer by the end of the year in addition to being the biggest consumer. Whether this will throw a wrench in OPEC+’s plan remains to be seen. We’ll learn more on that front over the St. Petersburg International Economic Forum starting this Thursday.

Do keep an eye out on the trade tariffs between US and China as escalations in this area will likely derail the global economy and hence oil demand. Negotiations over the weekend suggests that a truce has been called on this regard but you can never be quite sure with Trump in the driver’s seat…

One thing is for sure though, wholesale electricity prices has followed oil up and so will tariff.

Author: Ross Han, Trading Analyst, iSwitch Energy Team

Disclaimer: iSwitch will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, or any reliance on such information. The opinions expressed in this article are the author’s personal views and must not be construed as representing the opinion of iSwitch as a company.

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Will Rising Oil Prices Affect My Electricity Bill?

Flip a switch and it’s there for you – electricity is a core necessity in our lives and as a result, we often just pay our electric bill without much thought…until it suddenly goes up without us knowing!The thing is, most of our household electric consumption tends to stay relatively constant over a long period of time and the moment we see an increase in our bill, blaming the retailers, electricity generators or even the government seems to be the knee-jerk reaction. However, that isn’t always true and there is a factor that dictates how high or low your electric bill will be: the oil price. Huh? What does the oil price have to do with our utility bill? Quite a lot in fact!


The 2 Components Of Your Electric Bill
When you are paying for electricity (the SP Services electrical tariff), you are paying for the cost of the generation of electricity or how much is needed to create it. This tariff comprises of two key components – the fuel cost and the non-fuel cost. The non-fuel cost is rather standard, it is made up of:

Power Generation Cost
The costs needed to operate power stations that include manpower, capital and maintenance costs.

The Grid Charge Cost
The cost of transporting electricity through the power grid to your homes.

Market Support Services (MSS) Fee
The costs of billing and meter reading. While these fees are substantial, they are quite fixed and don’t really change much, however, more than 50% of your electricity bill comes from the fuel cost which is highly variable and changes everyday with even possibilities of big fluctuations. 95% of Singapore’s Electricity Is Generated By Gas. And yes, you might have guessed it, our gas supply is indexed or follows closely the price of oil!


The Oil Markets And You
Sure, this isn’t the most exciting topic around but seeing that the oil market will determine how expensive or cheap your electricity bill is, let’s take a closer look! Oil prices are set mainly by buyers and sellers in the market and are affected by a whole host of factors that includes supply and demand of the physical oil itself – if the world experiences or believes that there is a shortage of oil at any given moment, the price of oil will start to rise, reflecting the drop in supply. Conversely, if there is a global economic slowdown and the demand for oil drops, the price of oil will also be lowered. In 2005 when oil was around $55 a barrel, Singapore’s electricity tariff was 21.3 cents/kWh.* In 2012 when oil averaged around $110 a barrel, our national electricity tariff also saw an increase to 28.8 cents/kWh.* Fast forward 4 years ahead in 2016 when the oil prices plunged down to near $53 a barrel, the electricity tariff fell right down to 21.5 cents/kWh.* As fuel costs are a major factor to our electricity prices, the Singapore government has taken steps to secure our gas supply by importing a constant stream of gas and investing and developing our Liquified Natural Gas (LNG) infrastructure and supply. That means it is highly unlikely we will ever get a big increase in electricity prices from an interrupted supply issue.


What We Can Do As Consumers

The important thing to know is that as consumers we won’t be able to control the price of oil and the best way to secure our electric bill would be to better understand the option plans we have in front of us. There are two types of plans that we can choose from – Discount On Tariff (DOT) or Fixed Price.

Discount On Tariff (DOT) Plans
Most electricity retailers have a DOT plan available which just means your electricity bill will be tracking the oil prices that will affect the tariff prices. When there is a rise in oil prices, the tariff prices (as well as your DOT price) will rise and you pay more, however under such a deal you will always pay less than the SP Tariff. Conversely, if the oil prices fall, the tariff prices will also drop and you pay less on your electric bill. While this leaves you exposed to the rise and fall of oil prices, many consumers choose this for simplicity without a need to monitor the oil prices to make a decision on fixing a price.

Fixed Price Plans
Fixed price plans will mean you have 100% certainty on what your electric bill will be at the end of the month regardless of whether the oil price rises of falls. This price is fixed for the whole period of your contract. While this might mean you could lose out on savings when the price of oil drops, you are also protected should the oil price rise. Fixed price plans are ideal if financial budgeting and cash flow planning are critical in your household.

*EMA Publications and Statistics