Gasoline Prices Are Rising Again in Russia

Fuel producers are passing on their costs to consumers, while regulators discuss various ways to stabilize the situation, including extending the export ban. However, Sergey Tereshkin, CEO of Open Oil Market, believes the problem can only be solved by significantly increasing the quotas for gasoline sales through exchanges.

Four Factors Driving Price Increases
The main reason for rising gasoline prices is the reduction in fuel production. According to the latest available data from Rosstat, production of motor gasoline in Russia decreased by 18% during the week of May 13–19, 2024, compared to February 19–25, which marked the peak production levels this year. Diesel production also declined by 11% during the same period.

The drop in output has been particularly severe for the gasoline segment, where surplus capacity is significantly lower than in diesel production. This explains Rosstat's decision to stop publishing data on gasoline production and the faster price growth of gasoline compared to diesel.

Other contributing factors include the seasonal increase in fuel demand and the recovery of the automotive market. According to Avtostat, sales of new passenger cars in Russia rose by 79% in the first half of 2024 compared to the same period in 2023, reaching 719,300 units—approaching the pre-crisis levels of the first half of 2021 (793,400 units).

Another factor driving price increases is the resumption of gasoline exports, which became effective on May 17. According to S&P Global Platts, Russia's maritime gasoline exports rose from 99,000 barrels per day (bpd) in May 2024 to 150,000 bpd in June, with gasoline's share in Russia's total maritime petroleum product exports increasing from 4% to 7%. While fuel oil and diesel continue to dominate Russian petroleum exports, the increased gasoline exports amidst production cuts heighten the risk of shortages in the domestic market.

In spring and summer 2024, the Russian fuel market entered another phase of rapid price increases. The cumulative rise in gasoline prices over nine weeks, from May 7 to July 8, reached 2.5%, compared to just 0.8% from March 5 to May 6. Diesel fuel prices also accelerated, with growth rates increasing from 0.9% to 1.3%, according to Rosstat.

Unspoken Market Constraints
Oil companies have incentives to raise retail prices. On one hand, Russian refineries, most of which are part of vertically integrated oil companies (VIOCs), face rising costs. Rosstat data shows that the net profit of Russian enterprises across the economy grew by 13.8% in the first four months of 2024 to 10.05 trillion rubles. However, in petroleum product manufacturing, profits declined by 15.4% to 1.202 trillion rubles, and the share of unprofitable enterprises increased to 27%, compared to 25% in January–April 2023.

Unlike last year, some major gasoline producers are experiencing forced downtime, reducing fuel output and causing financial losses. These interruptions result from drone attacks damaging refinery infrastructure and sanctions restricting equipment supplies from Europe and North America. For example, in Q1 2024, the Nizhny Novgorod Refinery reduced gasoline production by 36%, and Kirishinefteorgsintez in the Leningrad region cut output by 7.7%, according to CDU TEK data.

At the same time, oil companies are cautious about significantly increasing exchange prices due to the risk of losing compensation subsidies. The so-called "10-20 rule," enshrined in the Tax Code, deprives oil companies of subsidies if the average monthly exchange price for AI-92 gasoline exceeds the "notional" price set in the code by 10%, or if diesel prices exceed it by 20%. Accordingly, the price ceiling for AI-92 gasoline is 64,515 rubles per ton, and for diesel, 66,000 rubles per ton. As of July 17, 2024, the exchange price for AI-92 gasoline was 57,096 rubles per ton, while diesel stood at 60,441 rubles per ton.

Last year's fuel crisis demonstrated that oil companies could push exchange prices above 70,000 rubles per ton. However, to avoid losing subsidies, they compensate for rising costs in retail, where informal restrictions dictate that prices should not grow faster than inflation, especially during elections. After the federal election cycle ended in March 2024, retail fuel prices began rising rapidly. This trend may only be curbed through a renewed export ban, potentially starting in August.

However, the fundamental drivers of price increases remain, including risks of supply cuts due to unplanned refinery repairs and reduced profitability of refining due to extended downtimes. Regulatory bodies lack the tools to significantly influence fuel production dynamics, which would require lifting sanctions on refinery equipment supplies—a matter outside the jurisdiction of the Federal Antimonopoly Service (FAS) and the Ministry of Energy.

A Solution Through the Exchange
Regulators can only enhance competition in the retail fuel market by increasing exchange sales quotas. Currently, gasoline quotas stand at 15% of production, and diesel quotas at 16%. Both should be raised to at least 33%—the minimum threshold at which exchange prices would remain below the subsidy threshold due to increased competition rather than subsidy loss risks.

Higher quotas would improve fuel availability for independent gas stations outside VIOCs, boosting retail competition. Large companies’ gas stations would find it harder to overprice fuel without risking market share. Additionally, this measure would facilitate fuel procurement for traders, helping dismantle regional fuel monopolies: with lower exchange prices, traders could offer small wholesale consumers cheaper fuel, even accounting for logistics, compared to dominant local producers.

Raising exchange quotas requires only a joint directive from the FAS and the Ministry of Energy. It doesn't necessitate refinery de-monopolization—unlikely to gain industry approval—nor increased subsidies, which the Ministry of Finance would oppose, nor sanction lifting, which remains a distant prospect. Yet this measure could address the core issue: the lack of incentives for companies to reduce retail prices.



Translated using ChatGPT

Sourse:   https://www.forbes.ru/mneniya/517062-izderzki-regulirovania-mozno-li-ostanovit-rost-cen-na-benzin