Petrol prices were on course last night to break the pound-a-litre barrier after the cost of crude oil on global markets rose to its highest level this year.
With the US navy putting on a show of strength off the Iranian coast and oil workers in Nigeria launching an indefinite strike, a barrel of Brent crude was trading for almost $72 last night – up more than a dollar on the day and within six dollars of last summer’s record $78.40.
Industry experts in the UK said motorists – already paying an average 97p a litre on forecourts – could expect to be paying £1 or more within six weeks.
Ray Holloway, of the Petrol Retailers Association, said petrol prices had been edging higher throughout spring against a backdrop of US stockpiling of crude. But he said the latest increase meant the upward pressure would continue for the next two months.
“Petrol at a pound a litre looks ever more likely,” he said. “It’s already 97p and there’s more to feed through. My guess is that prices will peak at the end of June or the beginning of July, when demand from motorists racks up in the US.”
Although a UN report paving the way for tougher sanctions against Tehran and the strike threat to Nigeria’s oil exports were the trigger for yesterday’s jump in the price of crude, analysts said the underlying cause of the upward trend has been concern over fuel supplies in the US, where petrol inventories have been rising but remain below average ahead of peak summer demand.
“The gasoline situation remains critical. Stocks are at a seasonal low with the driving season set to kick off this weekend,” Citigroup said in a research note.
Mr Holloway added that petrol prices were likely to start falling by the end of the summer but over the coming weeks consumers will see their incomes squeezed by the impact of higher transport costs and more costly borrowing.
The CBI intensified City speculation yesterday that the Bank of England will be forced into a fresh interest rates rise after the employers’ organisation’s monthly snapshot of industry showed the heftiest jump in prices from factories in 12 years.
A third of firms said they expected to raise prices over the next three months against only 8% preparing to reduce their tariffs, leaving a balance of +25 points, up from +16 in April. The percentage balance of firms pushing up prices is closely watched by the Bank’s nine-strong monetary policy committee, and has been on an upward trend for the past year.
“The Bank of England will focus on the price balance contained in the survey, and it will be dismayed by what it sees,” said Howard Archer of Global Insight. “The CBI survey adds to the pressure on the Bank to lift interest rates to 5.75% sooner rather than later, and a back-to-back hike in June is currently looking a very real possibility. There is an ever-growing danger that rates will reach 6% before the end of the year.”
The CBI said that the manufacturing sector continued “to go from strength to strength” but cautioned the Bank against a June rate rise. “We have not yet seen the impact of the four recent rises in interest rates on domestic demand so, while this data will be closely monitored by the Bank, there is little justification for another rate rise immediately.”
In its half-yearly health check on the global economy, the Paris-based Organisation for Economic Cooperation and Development said it expected inflation, as measured by the consumer prices index, to drop back to its 2% target this year but warned the Bank to “remain vigilant”. The OECD, a thinktank for 30 of the world’s richest countries, called on the government to use spending restraint to reduce the budget deficit.
A Treasury spokesman said the government would be able to meet its fiscal rules while allowing spending on public services to increase by an average of 2% a year.
Larry Elliott, economics editor
Friday May 25, 2007
The Guardian
