Although the Russian Government and oil companies suspended the agreement on fixing fuel prices last summer, gasoline rose in price much more slowly in 2019 than in 2018. In November, the 12-month price increase for 92-gasoline amounted to only 1.4%, while in November 2018 it reached an impressive 11.2% (hereinafter, Rosstat data, unless otherwise indicated). This difference was almost equally significant for 95-gasoline (1.9% versus 11.2%) and 98-gasoline (2.6% versus 9.7%), not to mention diesel (2.2% versus 17.2%).
2019: prices under pressure
Perhaps, a weak domestic demand has become a key reason for the slowdown in prices: from January to October, gasoline supplies to the Russian market fell by 1.4% in annual terms (to 29.2 million tons), while the sale of new cars dropped by 2.4% (to 1.42 million units, according to the Association of European Businesses), and the market for used cars - by 0.1% (to 4.48 million units, as follows from the Autostat agency). Since the domestic market still prevails over exports in the supply of Russian gasoline producers (88.1% versus 11.9% for the same ten-month period), this tempered their appetite for higher prices, not only in the retail segment but also in wholesale. From July, when the fuel agreement ended, through November, the average price of 92-gasoline at refineries decreased by 3.1% (to 46 006 rubles per ton, according to the Central Dispatching Department of the Fuel and Energy Complex – CDU TEK), and at petroleum depots - by 2.2% (up to 50 544 rubles per ton). Related: China’s Oil Demand Growth Could Halve This Year
The price growth slowdown was also associated with a drop in European prices, which are taken into account when calculating the damper, designed to compensate oil companies for the difference between fuel prices in Russia and abroad. Over the same period from July to November, prices for premium unleaded gasoline (with an octane rating of 91 to 93) decreased in the Mediterranean by 6.6% (to $588 per ton, according to CDU TEK), and in North-West Europe - by 2.9% (to $634 per ton). As a result, their difference with the average Russian price of 92-gasoline (excluding excise tax and VAT) decreased by $35 and $13, respectively (to $141 and $188 per ton). Another factor was the increase in the surplus in the domestic market, which occurred due to the fact that in February Tatneft launched the production of gasoline with a capacity of 1.1 million tons per year at the Taneko refinery. As a result, if in the first ten months of 2018, gasoline inventories fell by 22.8 thousand tons, then over the same period of 2019, they increased by 55.1 thousand tons.
2020: price surge risks
However, although gasoline prices have stabilized, nothing guarantees that in 2020 their average growth will be lower than annual inflation, as it was in November (1.7% versus 3.5%). The key risk factor is an increase in excise taxes, whose share in the retail price of 92-gasoline rose from 10.3% in 2011 to 19.9% in 2017 (Rosstat has no more recent estimates), while in 2017 excise taxes (10 130 rubles per ton) were almost a quarter below the newly established level (12 752 rubles per ton). Another risk factor is an increase in retail growth (from 1.2% in 2019 to 2.2% in 2020, as follows from the latest IHS Markit forecast), which is likely to happen against the backdrop of accelerating growth of the economy (from 1.1% up to 1.6%) that has already won back last year’s VAT increase.
Finally, prices will be pushed up by low competition in the Russian fuel market - as in gasoline production, where in 2018 the total share of Rosneft (including Bashneft), Lukoil, Gazprom Neft and Surgutneftegas amounted to 79.5% (31.4 million of 39.5 million tons, according to CDU-TEK). Moreover, in 2016, these companies, along with Tatneft, TAIF and NNK, occupied over 70% of the 92-gasoline retail market in 41 of 43 regions where the Federal Antimonopoly Service (FAS) analyzed the state of retail competition. The number of such regions in retail sales of 95 and 98 gasoline was 42 and 40, respectively. Since then the FAS has not provided more recent estimates, however, the retail competition is unlikely to have increased, given the purchase of Bashneft by Rosneft and the recent withdrawal of Finnish Neste from the Russian gas stations’ market. Related: Has OPEC Found Its Oil Price Sweet Spot?
That is why oil companies vary fuel prices depending on the solvency of car owners. Otherwise, it is difficult to explain why in November, despite the proximity of prices for 92-gasoline at the Moscow (47 201 rubles per ton), Yaroslavl and Ryazan refineries (46 850 rubles and 47 248 rubles per ton, respectively, as follows from CDU TEK), its retail price in Moscow (42.47 rubles per liter) was half a ruble higher than in the neighboring Ryazan region (41.96 rubles per liter), and almost one and a half than in the Yaroslavl region (40.99 rubles per liter), which is also located not far from Moscow.
Forced competition
The Government can mitigate low competition either by demonopolizing the industry (following the example of the Brazilian authorities, which forced Petrobras to start selling half of its thirteen refineries), or by increasing the share of mandatory gasoline sales at the commodity exchange (from the current 10% to at least 35%). The latter would partially deprive oil companies of the opportunity to sell gasoline directly through their own sales subsidiaries, and at the same time would make it more accessible to independent fuel retailers, which, according to the FAS, account for 60% of gas stations, but only 40% of retail fuel sales. Another measure could be the long-term freezing of excise taxes, which the Government resorted to from 2005 to 2009, when excise taxes on gasoline were fixed at 3 629 rubles and 2 657 rubles per ton (depending on its octane number) to minimize consequences of the explosive rise in oil prices.
Such steps would certainly bring no less results than any manipulations with the damper, which is formally designed to compensate for the export alternative. But its impact is limited by the insignificance of exports, which reached only slightly more than 10% in gasoline production in the first ten months of 2019 (3.9 million out of 33.1 million tons). However, as the past few years have clearly shown, the dynamics of the fuel market is determined not only by the balance of supply, exports and domestic demand, but also by how tolerant the government is to price fluctuations. That is why the policy regarding fuel producers will ultimately depend on whether the regulators deem it necessary to pull the reins and force the oil industry to re-fix prices.
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By Kirill Rodionov for Oilprice.com
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