The Russian fuel market will return to a ban on gasoline exports starting August 1, which, according to the current plan, will last until September. Experts believe that manual regulation has become the basic approach for the near future, but this carries certain risks.

The gasoline export ban, suspended at the end of May, will resume on August 1 for at least a month. The opening of the export channel did not lead to a significant increase in oil refining, while wholesale gasoline prices increased by 10-30% over just two months, according to exchange data.

For instance, the price of AI-92 increased by 13% from May 20 to July 30, reaching 54,486 rubles per ton, while AI-95 rose by 29%, to 72,712 rubles per ton, according to data from the St. Petersburg International Mercantile Exchange (SPbMTSB). Gasoline prices have been rising almost continuously since June, only correcting downward in the 20s of the current month. Moreover, on July 24, AI-95 reached its highest price of the year, reaching 75,296 rubles per ton, close to the historical record of 76,876 rubles per ton set last autumn during the fuel crisis.

Following the wholesale price growth, retail prices also accelerated. In June, weekly gasoline price growth averaged 0.2-0.4% across Russia, while in July it was 0.5-0.6%, according to Rosstat data. By July 22, gasoline prices had increased by 4.7% compared to December 2023, while the official inflation forecast for 2024 was 5.1%.

The Ministry of Energy believes that fuel prices in the retail segment remain stable, with no shortage of supply, and that the domestic market is fully supplied with gasoline and diesel fuel, the government reported on July 28 following a meeting with Deputy Prime Minister Alexander Novak. In mid-July, Novak also described the situation in the market as stable, but noted the "sensitive" reaction to the dynamics of AI-95 gasoline supplies.

Against this backdrop, the government decided to return to the ban on gasoline exports starting August 1. There is also discussion about extending this ban into September and October, Novak said.

New Fuel Market Regulation Model

The gasoline export ban is not a first-time measure; the government implemented similar restrictions last year during the fuel crisis in the autumn. However, this time, the measure is presented as preventive for the high-demand period and scheduled maintenance at oil refineries in the spring and summer. The ban was introduced on March 1 for six months, with the possibility of lifting the embargo, which occurred at the end of May due to the risk of reduced refining volumes. Despite the established rise in exchange prices, gasoline exports were allowed for another month in June — until July.

Thus, the current fuel market regulation model relies on three parameters, according to Sergey Tereshkin, CEO of the oil products and raw materials marketplace Open Oil Market. These include the damping mechanism, which sets limits on exchange price growth for diesel fuel and AI-92 gasoline; actual price growth rates for gasoline and diesel, which must not exceed general inflation rates; and export bans, which take effect when retail price growth accelerates sharply.

"Whether this model will continue depends on the federal budget situation and the National Wealth Fund (NWF). <...> Next year, the government will have fewer resources to subsidize oil producers, with subsidies totaling 1.9 trillion rubles for the first half of 2024, including the damping mechanism, reverse excise, and investment supplements. This will likely lead to changes in the fuel market regulation model," Tereshkin believes.

The "manual regulation" scheme with the temporary export ban has become a tool that the market will have to live with for a long time, says Maxim Dyachenko, managing partner and board member of Proleum. "This has been discussed for many years, but until last autumn, the government was afraid to implement this measure. Now, it is convinced that there are no fatal consequences for the industry as long as the domestic market is saturated, after which exports can be quickly reopened," he says.

To move away from this model, complex changes must be implemented, such as developing the futures market and risk hedging culture among both buyers and suppliers, Dyachenko believes. "This is something that is developed and implemented over a long period. But it seems the government is focused on quick and simple solutions. Although, of course, in the medium- and long-term perspective, such practices negatively impact the industry," he adds.

Tereshkin believes that the government currently has few alternatives. One option is a "serious" increase in exchange norms for gasoline and diesel, which currently stand at 15% and 16% of production volumes, respectively. "Increasing the exchange norms will significantly increase fuel availability for independent gas stations, which will help curb retail price growth," he says.

Impact of Manual Management on the Market

The downside of the current model of managing the domestic fuel market is the lack of long-term planning opportunities, says Viktor Katona, senior analyst for oil markets at Kpler. In this system, companies do not know how long gasoline exports will be allowed, so they will produce only enough excess to avoid overfilling their oil storage in case of a sudden export ban.

"The problem is that the Ministry of Energy should determine export policies not for one month ahead but for at least two to three months. This is the time required to load oil products at Russia's export terminals. That means decisions about additional capacity loading will only be made if there is a guarantee that, say, in September or October, there will be no restrictions," he notes.

The current suspension of the export ban has not led to a significant increase in refining, with the refining rate fluctuating between 5.45 and 5.5 million barrels per day, Katona estimates. "Partly, this is due to the Tuapse refinery being attacked by drones again, and partly because NOVATEK has not yet implemented the third line of its condensate fractionation unit in Ust-Luga. There is also a problem with bringing some refineries back online due to technical reasons," he explains.

Dyachenko believes that gasoline production is currently at a fairly high level, around 850,000 tons per week, which is higher than in April or early summer. "However, another change has occurred that was probably not anticipated. We produce 60% AI-92 and 40% AI-95, but consumption is the opposite. <...> There is a clear shortage of AI-95, which is difficult to produce and increase quickly. It requires significant investments and a long investment cycle. While overall gasoline production levels may be sufficient for domestic needs, there is not enough high-octane gasoline. Therefore, an export ban may not solve this issue," he says, noting that manual regulation reduces manufacturers' interest in investing in production.

At the same time, the suspension of the export ban has supported refining margins, which are currently at a comfortable level, experts from Petromarket calculated for RBC. "Margins depend heavily on the prices at which the products are traded on the domestic market. If there had been an export ban on gasoline and diesel in July, domestic prices would have been significantly lower, which would have negatively affected refining margins," say analysts from the company.

The net margin of a refinery is the value of the basket of oil products produced by the plant, minus the cost of raw materials and operating expenses, with the addition of subsidies like the reverse excise tax and damping and investment supplements from the federal budget. According to Petromarket estimates, as of July 26, this margin for a typical refinery focused on gasoline production is 11,700 rubles per ton of processed raw material, while for a refinery focused on diesel production, it is 12,100 rubles per ton. These figures are higher than at the beginning of the year—5,900 rubles and 9,300 rubles per ton, respectively (as of January 9)—and higher than the average margin for January-July of this year, which was 9,300 rubles and 11,400 rubles per ton, respectively.

Will the Gasoline Export Ban Be Extended in the Fall?

Retail price growth is expected to slow somewhat in August, believes Tereshkin. He believes that oil producers will hold back prices to expedite the lifting of the export ban. "However, the restrictions are likely to remain in place in September, and their removal should be expected only as the cold season approaches, when demand for fuel in passenger vehicles starts to gradually decrease," he says.

Dyachenko notes that the decision to extend the embargo into September-October will depend on the balance of supply and demand. "September is traditionally a month of high demand, as people return from vacations, the school season starts, and consumption in cities increases. At the same time, September-October is the active period for refinery maintenance. Based on this, I assume the government may extend the restrictions," he concludes.

RBC has sent a request to the Ministry of Energy.



Translated using ChatGPT

Sourse: https://www.rbc.ru/business/31/07/2024/66a8e7779a7947cafd9a33a4?from=newsfeed