The black stuff is falling out of bed. Brent crude has slumped to levels not seen since before the Iranian escalation, settling at $72 a barrel in early Asian trading. That is a 15% drop from the panic highs of two weeks ago, and it is delivering an unexpected gift to British drivers.
At the pumps, the average price of a litre of unleaded has slipped below 140p for the first time in three months. Not exactly cheap, but a 4p decline from last week's peak. The RAC calculates this knocks about £2 off a typical tank fill-up. Every little helps when the cost of living is still chewing into household budgets.
What is driving this? The usual suspects: demand destruction fears and a supply glut. The International Energy Agency's latest monthly report revised down global demand growth for 2025 by 300,000 barrels per day, citing weakening manufacturing data out of China and Europe. Meanwhile, OPEC+ is reportedly mulling an additional production increase in May, despite internal friction. The cartel is losing its grip.
Then there is the geopolitical risk premium evaporating. The tit-for-tat strikes between Iran and Israel have not escalated into a full-blown blockade of the Strait of Hormuz. The market had priced in a worst-case scenario that now looks less likely. War is bad for business, but so is the uncertainty that drives hedging and hoarding. As the fog clears, the price falls.
For the UK Treasury, this is a mixed blessing. Lower oil prices ease inflationary pressure, giving the Bank of England more room to cut rates. The gilt market certainly welcomed the move: the 10-year yield dipped 8 basis points to 4.12% this morning. But the Treasury will also see a hit to North Sea revenues, which have already been squeezed by the windfall tax. Every silver lining has a cloud.
Can this reprieve last? I am sceptical. The underlying supply dynamics are still tight. Global inventories are below the five-year average. And if the US economy shows signs of overheating, the Federal Reserve will be forced to keep rates high, dragging the dollar up and putting pressure on oil prices again. For now, motorists should enjoy the discount while it lasts. The market is a fickle mistress.
Capital flight out of commodities and into bonds suggests a broader risk-off mood. Investors are betting that central banks will pivot to easing. That is a dangerous game. If inflation proves sticky, the punch bowl will be snatched away. The oil price fall is a classic 'relief rally' in a bear market. Do not confuse a few pence off petrol with a structural shift. The fundamentals remain as murky as ever.
In short, the pump price dip is a welcome anomaly in a turbulent market. Savour it. But keep an eye on the headlines. One unexpected drone strike and we are back to square one.
