Gasoline price may rise by 30% to 2025 | FinReview
29 April 2020

Gasoline price may rise by 30% to 2025

The share of oil in the cost of gasoline is only 11-14%, so its cheapening slightly affects the retail cost of fuel. Nevertheless, prices will increase in the long run, since by 2025, within the framework of the EAEU, a common market for oil and oil products should be launched, which will make it possible to equalize the prices for fuel and lubricants between the member countries of the union.

An event significant for the oil industry took place on April 20, but with a minus sign – on the NYMEX American oil exchange, the price of May WTI crude oil futures fell sharply, breaking several anti-record milestones at once: first 10 US dollars per barrel, then 0.1 US dollars per barrel, and finally, 40 US dollars per barrel. At the close of the exchange, the cost was -37 US dollars per barrel, which in any case is an absolute anti-record.

Other grades of oil also went into the negative zone, but not so much: for example, North Sea Brent oil fell to -3 US dollars per barrel, and Russian Urals to -3.5 US dollars per barrel.

What does negative oil price mean?

Due to the coronavirus pandemic, global demand for black gold fell by 20 million barrels per day. Despite this, countries continued to produce oil, thereby increasing surplus in the world market. According to preliminary estimates, in the second quarter of 2020, the excess of oil may reach about 14.7 million barrels per day.

However, the capacity of the world’s tanks and tankers is not enough to store the daily increasing surplus of oil. Already now, the fullness of oil storage facilities in the world exceeds 70%. For example, the main US reservoir in Cushing (Oklahoma) is 72% loaded with a total capacity of 76 million tons, and about 160 million barrels are stored in tankers around the world – this is more than Kazakhstan’s annual oil production.

As a result, traders bear the costs of transporting and storing oil, which already exceed the price of the product itself. Therefore, they are ready to get rid of black gold in order to reduce financial losses.

To do this, on April 20, traders set negative oil prices. It is important to note that such an event is primarily short-lived, as it happened at the moment before the close of trading on May supply contracts. That is, they are set for future transactions, and not for oil itself.

Nevertheless, this is an alarming precedent that demonstrates the volatility of the oil market. In particular, negative prices reflect the concerns of traders that current surpluses will not be reduced due to agreements reached under OPEC +.

Against this background, the June futures are also declining on April 28 at 22:00 Moscow time: Brent was trading at 22.75 US dollars per barrel, and WTI was trading at 12.73 US dollars per barrel.

However, falling oil prices did not help Kazakhstan gas producers

Since 2018, after the modernization of oil refineries, Kazakhstani producers for the first time in a long time were able to fully cover domestic demand for fuel. Now refineries are able to produce gas 24% more than the needs of the market, and the nearest fuel shortage will arise no earlier than 2032. This is certainly a significant event for the oil and gas sector of Kazakhstan, as the import of expensive gasoline into the country decreased by 32 times.

Accordingly, logically, the main benefit from the record low oil prices offered by producers of raw materials should be given to oil refineries. However, in reality, things are not so simple – while the price of oil has fluctuated significantly over the past three years, falling and increasing, the price of gasoline has been changing smoothly, having risen in price only in October 2017.

Most likely, March gasoline prices would be fixed in the domestic market, but the state of emergency introduced in the country on March 16 due to the COVID-19 pandemic reduced its consumption. Therefore, gas stations were forced to lower the cost of fuel in order to stimulate demand for it. Now the price of AI92 varies from 150 to 152 tenge per liter, and AI95 – from 172 to 175 tenge.

In foreign countries, low oil prices also did not lead to an unprecedented reduction in the cost of automotive fuel. Retail prices for gasoline in different countries of the world on April 20 showed a decrease of 13% on average compared to March 9, when oil quotes collapsed amid the collapse of the OPEC + deal. In Kazakhstan, prices fell by 11%. It is quite objective that the recalculation of these prices was carried out on the basis of a significant decrease in the exchange rates of national currencies against the dollar. Nevertheless, the cost of fuel in Kazakhstan remains one of the lowest in the world, and the country in this indicator is in the TOP-15 countries, occupying 11th position.

Why is gasoline not getting cheaper with oil?

Oil producers supply from 30% to 50% of oil to the domestic market at prime cost, namely, in the range of 25-30 US dollars per barrel. Now the cost of futures for Brent crude oil is less than 25 US dollars per barrel, so it is more profitable for oil companies to sell it domestically.

The retail price of gasoline is formed from its wholesale price at the refinery, taking into account all the associated costs of delivery from the plant to the gas station (storage at the tank farm, operating expenses, taxes, banking, VAT, contractor margin, etc.). At the same time, the share of oil in pricing is only 11% – 14%. Therefore, its cheaper slightly affects the cost of gasoline.

Another factor has a more significant effect – a drop in demand. By mid-April, domestic demand for automotive fuel fell by 40%. Such a situation may cause overstocking of the domestic market, which subsequently forces producers to reduce the cost of gasoline in order to reduce financial losses from its storage and transportation.

From the beginning of March, wholesale prices for gasoline and diesel fuel in the domestic market fell by 10%. Thus, the cost of gasoline decreases not so much from a drop in oil prices, but from a decrease in demand.

However, in the long run, gas prices will increase by 30%

Since the beginning of March, the price of gasoline has decreased by 11%, but this is mainly due to the weakening of the national currency. Nevertheless, prices may still fall, but not significantly, since the cost of gasoline has not changed due to the lower volatility of the domestic market oil price compared to world prices.

In the long run, prices are likely to increase, especially by 2025 within the framework of the EAEU, a common market for oil and oil products should be launched. This will allow equalizing gas prices between the member countries of the union. Considering that Kazakhstan has the lowest prices among the EAEU countries, the price increase for fuel and lubricants will be about 30%.


Oil refining investments will help reduce gas costs

The modernization of the three refineries, which ended in 2018, cost the country 6.3 billion US dollars. Some of these funds were raised in the form of loans from the Development Bank of Kazakhstan, the Export-Import Bank of China, the Japan Bank for International Cooperation, etc. Obviously, the debt load on the refinery is reflected in the cost of gasoline. Therefore, due to a decrease in demand for fuel, the price of gasoline may be increased after the closure of the emergency mode.

However, gasoline is a socially significant product, and its price affects the pricing of other goods. That is, a rise in prices will cause a decrease in the consumer ability of the population, which has a negative effect on the economy. In this situation, Kazakhstan needs to reduce the impact of the credit burden on the cost of automotive fuel. It is possible to achieve such a result by attracting investment funds that will allow domestic refineries not only to increase capital, but also to increase production, due to the expansion of the geography of fuel sales to foreign markets. Moreover, the cost of gasoline in the country remains one of the lowest in the world, which means that its export represents a significant benefit for investors.