Why fuel prices keep climbing

Uganda being a major importer of petroleum products picked major lessons from last year’s fuel crisis. 
The country’s oil experts are weighing on the current upheaval in global oil prices and whether this could land the country into another fuel crisis. 

Crude oil prices continue to hover between $80 (Shs294,684) and $65 (Shs235,747) per barrel for Brent- a global bench mark for oil pricing purposes. 
This uneven nature of crude prices has forced oil companies and government to closely monitor oil prices as they gauge from lessons learnt. 

A combination of factors can be explained for the uneven crude oil prices. 
The Sustainable Energies and Petroleum Association of Uganda general manager, Anthony Ogalo, puts it this way that crude oil politics at global level are so complex resulting into economic wars.

 In his analysis, he says the war in Ukraine has had an impact on crude pricing, and other factors such as interests of the Organisation of Petroleum Exporting Countries (OPEC). 

Environmentalists have become a factor too, pushing for alternative green energies away from fossil fuels.      
“You will notice that when OPEC cut its production, the prices went slightly up because the market was jittery on supply; the war in Ukraine and the sanctions in Russia became a problem,” Ogalo says.

Bank of Uganda Deputy Governor, Micheal Atingi- Ego expressed fears last month that there were upside risks such as tighter global financial conditions to inflation that could force the shilling to weaken.
Simply put, a weak shilling could mean a high import bill for fuel and other products.   

Uganda’s industry analysts argue that the current erratic changes in oil prices won’t have an immediate significant impact on the pump fuel price.

In fact for Tom Ayebare Rukundo, manager, economic and financial analysis at the Petroleum Authority of Uganda, he says the current OPEC cuts are not drastic enough to take crude oil prices above $80 (Shs294,684) a barrel, and hence it will largely not impact the pump prices.

“Unless there is a major impact regarding the logistical movement of the product, we don’t foresee a major impact on the pump prices,” he says.

Pump prices for a litre of petrol rose past the Shs7,000 mark in July last year with some upcountry cities and towns reporting buying petrol at Shs10,000 a litre. This has since dropped to Shs4,750 and and Shs5,000 for a litre.  

Crude oil versus fuel economics
Firstly, the crude oil, and finished petroleum markets work differently.
Ogalo explains the pump fuel price is determined closely by the finished or refined products market, but does not directly relate to crude oil prices. It is also determined by Platts, among other factors. 

The Platts which is the refined petroleum price index has been identified as the key determinant of demand and supply for finished petroleum products on the international market.  

The Platts uses a pricing methodology based on data collection, analysis, and consultation with market participants.
It is designed to provide fuel buyers with more informed decisions about when to buy, how much to buy, and at what price.

Platts’ benchmark prices reflect the many factors that can influence fuel prices, such as regional supply and demand imbalances, and transportation costs – all of which result in changing market conditions, and therefore different reported rates through Platts.

Platts puts together all finished products trading activity which determines the average price of the day and month from direct purchase.  

Ogalo says the average crude price partly drives Platts fuel prices, but this might not be reflected on the pump price because Platts is clearly dependent on demand and supply of refined petroleum products.
“If you can have excess crude which is not refined, it will not influence the price of the pump on the market,” Ogalo says. 

Let’s put this in perspective, take for instance, in the last six months, crude oil prices on average hovered from $85 (Shs313,102) to $69 (Shs254,165) per barrel of oil.   

When you relate this to the Platt prices in the same period, they do not necessarily match.
Even as crude prices rise or fall, this is in contrast with the Platts average price for June which rose by $30 (Shs110,506) from the May average.

The Platts index shows that diesel rose from $620 (Shs2.2m) to $650 (Shs2.3m) per 1,000 kilogrammes in volumes, while Petrol rose from $790 (Shs2.9m) to $820 (Shs3.02m) per 1000 kilogrammes in volumes.
Petroleum products on the international market are measured in kilogrammes.

This contrast in crude and fuel prices shows that international fuel prices are largely determined and dependent on past crude prices, say six months or a year ago.

“It could be one of the factors for the rise depending on how refineries bought crude oil, and secondly, the prediction of demand in future based on factors such as weather (summer and winter),” Ogalo says.  
Therefore, for oil marketing companies trading in bulk fuel, the Platt fuel price has a direct bearing on their purchases based on the Platts average price quoted within a particular month.

So, if fuel bought in June on the international market is shipped to Uganda by the end of August, there is a likelihood that the price could be higher even if the crude price is low by that time.
This is considering other factors such as the time lag in delivery time, and the shipping costs involved.
“When you see prices going up, when the crude is down, remember the fuel product was bought with the June price but it took time to arrive,” Ogalo says.

However, Ogalo notes that erratic price changes on the international market sometimes force oil marketing companies to absorb such price shocks to stabilise the market.
“Sometimes they sell at almost zero margin just to sustain their market share because it is a competitive environment,” Ogalo says.

Uganda imports between 190 and 230 million litres of petroleum products per month mainly from the Arab Gulf with major refineries in Saudi Arabia, Dubai, India and other far flung markets such as Malaysia, the Mediterranean, and the Italian belt.
Ministry of Energy Commissioner of Petroleum Supply, Rev. Frank Tukwasibwe says the impact of the erratic changes in crude prices cannot be foretold, or predicted.

However, he believes the impact will be absorbed by competition of global refineries.
He notes based on the fact that oil marketing companies import from where there is a better deal;  therefore, there will not be any immediate impact.

Global oil politics
Data from the S&P Global Commodity Insights shows the Russia- Ukraine war has been a major factor that has triggered a major upheaval in the global oil markets, forcing Moscow to find alternative buyers and Europe to source new supplies as Western sanctions seek to clamp down on Moscow’s vital oil revenues.

With an EU embargo and the G7 price cap on Moscow’s oil now fully in place, Russian seaborne crude exports remain resilient as more volumes head into Asian markets.   
Russian oil now accounts for almost 40 percent of Indian crude imports, which is close to the estimated maximum of 40-45 percent that refiners could technically process given the quality of the crude.
OPEC+ has been forced to cut down on production as a measure to stabilise oil prices.    

Crude oil production from OPEC+, a coalition of OPEC and other oil producers such as Russia fell by 300,000 barrels of crude per day (b/d) in March as sanctions hit Russian output.

OPEC’s leading producer Saudi Arabia plans to slash its crude output by a further 1 million b/d in this month, bringing the alliance’s total cuts to 4.7 million b/d in the month, or about 5 percent of global cap.

OPEC has a significant influence on oil prices by setting production targets for its members and controls about 71 percent of total world proved crude oil reserves and accounts for 36 percent of total world reserves.
It is anticipated that Saudi Arabi needs to the price of Brent crude to rising above $80 (Shs294,684) a barrel.
African countries fell on the sharp side of the blade as OPEC announced new quotas in June.

OPEC’s African members -- Nigeria, Angola, Gabon, Equatorial Guinea and the Republic of Congo -- have seen their influence in the bloc shrink in recent years as crude production has slipped well below their quotas.
 They find themselves crowded out by the Saudi-Russia axis of power, following the creation of the OPEC+ coalition in 2019.

African countries saw their 2024 baselines chopped significantly, while the United Arab Emirates had the opportunity to increase oil production.
Nigeria’s quota, for instance, was reduced from 1.742 million b/d to 1.380 million b/d, while Angola’s was cut from 1.455 million b/d to 1.280 million b/d.

Turning to the oil market, OPEC forecasts that global oil demand will grow by 2.4 million barrels per day in the second quarter of 2023.But, eyes are set on the struggle ahead.

S&P Global analysts see market fundamentals tightening from June through September, with peak seasonal consumption and sharply falling oil inventory levels. 

In terms of products, jet kerosene and gasoline are anticipated to be the drivers of demand, while diesel is expected to be subdued by weak economic activity and geo-politically induced supply-chain bottlenecks in Organisation of Economic Cooperation and Development (OECD) countries.   

 In the non-OECD countries, the opening of China is expected to drive oil demand. Improvements in air travel, mobility and manufacturing sector activities are projected to support jet fuel and kerosene demand.
However, OPEC predicts that as the services sector-related spending tightens in the third quarter of 2023; inflation, financial tightening and rising geopolitical uncertainty, may dampen the growth towards the end of the year.