Petrol Prices Will Rise by Late Fall, Experts Say

ASTANA – According to experts, Kazakhstan will have to match Russia’s fuel prices in the next six months.

Its northern neighbour has now increased fuel prices by 30 percent due to an increase in commodity prices against the background of developments in Libya and Egypt. This is sure to affect the limit or possible ban of exports of high-octane petrol from Russia to the Kazakh market, which is still waiting for the day when its own refineries can produce fuel in sufficient volume.

Rising oil prices

Last week there was another increase in oil prices. Today the cost of a barrel of the much-in-demand Brent is close to $110, while two weeks ago it was little more than $100. International experts explain that prices for energy sources are rising because in many countries there is a risk of supply reduction, especially in the OPEC countries.

The main problem today is Libya. The war as well as protests and strikes have affected oil production. According to recent estimates, production has dropped to 400,000 barrels per day, a considerable decrease. Supplies from Libya have been disrupted over the past three weeks and currently three key export terminals are closed. This means that even if a sufficient amount of oil was being produced in Libya, it couldn’t be sent anywhere.

World stock exchanges had hoped that Iraq would be able to quickly increase its oil production, but with the current lack of proper infrastructure, oil deposits cannot be quickly developed. Last month, oil production in Iraq decreased and is now at only three million barrels per day.

The political crisis in Egypt is also contributing to the rise in oil prices.

The principle of interconnected vessels

Russia always responds promptly to changes in oil prices, and prices rise there nearly as quickly as they do at the source. Specialists speaking about fuel prices in the Kazakh and Russian markets have noticed that the so-called principle of interconnected vessels, in which a liquid reaches the same level in connected vessels, is at work here.

According to official data, the total demand for fuel in Kazakhstan is about 2.5 million tons per year. About 700,000-800,000 tons, or 30 percent of that amount, are brought from Russia, in particular high-octane petrol, which has become especially popular in Kazakhstan in recent years.

“Kazakhstan is still dependent on Russia in terms of supplyin the internal market with certain types of fuel, including in terms of pricing,” Senior Analyst at the Agency for Investment Profitability Research Artem Ustimenko said in an interview.

Ustimenko noted that in certain fuel categories, domestic refineries will be unable to meet demand until 2016; that is, until the completion of their modernisation.

“In this context, any changes in the Russian market of oil products in one way or another affects Kazakhstan,” he said.

Since July of this year, wholesale petrol prices in Russia have increased almost by 30 percent. One of the main reasons, in addition to the growth of world prices, is the closing of a number of major Russian oil refineries for repairs.

However, according to Kazakh oil refiners, Kazakhstan should not worry about an increase in fuel prices, at least not for the next two months.

“Since the beginning of the year, domestic tank farms have accumulated sufficient reserves that will allow for maintaining the price of petrol,” General Director of Pavlodar Petrochemical Plant Shukhrat Danbay said.

According to him, the rise in prices of oil products by 30 percent in neighbouring Russia will allow Kazakhstan’s refiners solve the problem of their own overstocks.

“Containers are now being unloaded at a rapid pace,” Danbay commented.

This two-month ‘independence’ from prices in the neighbouring market is due to the same changes taking place in Russia.

In the beginning of the year in Russia, at the legislative level, production of petrol Euro-2 stopped, and all unsold volumes of fuel went into Kazakhstan’s market at dumping prices. For the first four months of this year, 610,000 tons, more than half of the annual rate of export, came into Kazakhstan.

As a result, for the first time in the last three years Kazakhstan’s oil refineries were overstocked with their own products. The Pavlodar petrochemical plant found itself on the verge of stopping several times. Kazakhstan’s Ministry of Oil and Gas, after a long delay, applied restrictions on the supply of petroleum products from Russia to Kazakhstan to try to rectify the situation.

“But since July this year, the situation has changed. All this Russian unsold petrol on the Euro-2 ended; our market has fully digested it. In addition, supplies of high-octane petrol from Russia stopped due to the deficit associated with the closure of three factories there. So they began to unseal the Kazakhstani oil kept from the beginning of the year on our tank farms,” Danbay said.

Slack before the jump

However, according to Ustimenko, the excess of fuel that built up in Kazakhstan’s refineries and traders can be considered “only a temporary deterrent, allowing us now to reduce the pressure from the Russian market.”

But in the future, Kazakhstan will still have to buy Russian high-octane petrol, as the domestic factories will be able to saturate the domestic market only after their upgrade, which won’t happen before 2016.

Ustimenko acknowledges the possibility that the Russian market may take a break, but in his opinion the situation will only be exacerbated this month.

If the shortage of oil products in Russia, caused by the temporary closure of three refineries, continues for the next two to three months (especially in a scenario of an export ban by Russia), it could definitely provoke a shortage of high octane petrol in the Kazakhstan market and, consequently, strengthen the position of industrial companies lobbying for an increase.

“However, the Russian authorities are now taking tough enough measures to overcome the shortage of fuel. The export of motor fuel is limited; anti-monopolists are going to start proceedings against individual companies. Refiners are also recommended to reduce the production of petrol Euro-5 in favour of Euro-3. However, such measures are not as effective as we would like,” Ustimenko said.

In his opinion, if Russian government measures don’t lead to the expected results, Kazakhstan will have to catch up to the Russian market in terms of price in the next six months.

Meanwhile, gas station owners in Kazakhstan state that the wholesale price of fuel in Kazakhstan has increased since Russia’s price hike.

“It is only a matter of time before the rise in wholesale prices influences retailers to raise their prices considerably,” Director of the Aurika retail network Nikolay Serebryakov said.

With the current price gap, gas stations are suffering losses in their margins. They are unlikely to succeed in keeping retail in the domestic market.

Kazakhstan’s Ministry of Oil and Gas sets the maximum allowable fuel prices in order to protect the country from extremes. However, experts say the market will get its share of the cake. Now it is not in the time of harvest, as it was before, but with its completion or later, the price for fuel will rise.

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