Falling fuel prices: Is it too early to jubilate?

Over the last three to four weeks, fuel pump prices have been slowly dropping, leaving consumers wondering whether this is a tell-tale sign of a return to pre-Covid-19 pandemic prices or simply a one-off relief. 
   
Prosper Magazine has also established that the easing pump prices should have started happening in the country at least two and half months ago, but the fuel (dealers) companies could not adjust downwards because they had overstocked before the international crude prices started easing. 

However, industry analysts say this is particularly mindboggling, considering that fuel companies (dealers) here are quick to increase pump prices, but drag their feet even when circumstances that resulted into rising pump prices stabilise.

Explaining the recent drop in pump prices, Mr Ayebare Rukundo, manager economic and financial analysis at Petroleum Authority, says the drop in fuel prices has been forced by headwinds of the economic slowdown, China’s lockdown over Covid-19, and Germany weaning herself from Russian oil and gas imports. 

These changing patterns saw industries shutdown or remain constrained to produce in Germany, creating less demand for petroleum products. 

Rukundo’s second argument is that high interest rates as a measure to control inflation have rattled markets, increasing the cost of accessing money, and lessening cash flow in the market.

“Many countries are following similar trends, decreasing the rate of economic activity, hence lowering the overall demand for oil and gas,” Rukundo explains.
   
However, Rukundo says, it is too early to celebrate. 
“If you look at it from the international scene, this just follows the trend of the international crude oil price that peaked around March, then dropped, and peaked again in June,” Rukundo says. 

Rukundo notes that currently, the trend for refined products is simply following the trend in the drop of international oil crude prices, and a flip in rise of crude oil prices will spike fuel prices to rise. 

Global dynamics  
On October 5, OPEC, Saudi Arabia and Russia – took a unanimous step to adjust downwards the overall production of crude oil by 2 million barrels per day starting November 2022. 

OPEC, and two major producing nations make a coalition known as OPEC+ which includes other world’s major non-OPEC oil-exporting nations. 

OPEC explained in a statement that the decision was in light of the uncertainty surrounding the global economic and oil market outlooks, and the need to enhance the long-term guidance for the oil market.

Looking ahead, OPEC predicts that the challenges presented by the heightened levels of uncertainty, the slowing economic growth and a possible resurgence of Covid-19 restrictions in China, and elsewhere are expected to impact oil demand in 2022 and 2023. 
OPEC+’s October market report shows oil demand trends are still gloomy.

 
Global oil demand is projected to grow by about 2.6 million barrels per day in 2022. However, risks remained skewed to the downside, with slowing growth in the global economy, if continued, likely leading to lower oil demand in the months to come.

OPEC+’s decision is already rattling oil markets, pitting the United States of America against Saudi Arabia. 
There are fears that oil prices that had started dropping could rise again with a cut in production. 

Stay warned
US President, Joe Biden warned of ‘dire consequences’ to Saudi Arabia as quoted on the CNN in what Biden described the decision, as the Saudi Kingdom taking sides in “international conflicts” and that it was politically motivated against the USA.
 
Biden said the cut will lead to higher oil prices. This is viewed as a way of Saudi Arabia helping Russia, the world’s second-largest oil exporter to finance its war in Ukraine.

Saudi Arabia in a statement on October 13, shows the decision on crude oil cut was based on economic considerations that take into account maintaining balance of supply and demand in the oil markets, as well as aim to limit volatility that does not serve the interests of consumers and producers, as has been always the case within OPEC+.

The Saudi government said, through its continuous consultation with the US Administration that all economic analyses indicate that postponing the OPEC+ decision for a month, according to what the US had suggested, would have had negative economic consequences.

The International Energy Agency last Thursday warned that the OPEC+ bloc’s plan to sharply curtail oil supplies to the market has derailed the growth trajectory of oil supply through the remainder of this year and next.  This is likely to result in higher price levels, exacerbating market volatility and heightening energy security concerns. 

The Agency noted that with the unrelenting inflationary pressures and interest rate hikes taking their toll, higher oil prices may prove the tipping point for a global economy already on the brink of recession.

Hovering prices 
Brent crude oil prices hovered from $92 per barrel in February, hitting a high in June at $122 per barrel and have dropped to $91 per barrel this month, largely influenced by the Russian- Ukraine war.
 
Brent crude is the leading global price benchmark for Atlantic basin crude oils and is used to set the price of two-thirds of the world’s internationally traded crude oil supplies. 

The decline in OPEC+ supply will be smaller than the announced 2 million barrels per day reduction in production targets, with the majority of the alliance’s members already producing well below their ceilings due to capacity constraints.

The Energy Agency currently estimates a decrease of around 1 million barrels per day in OPEC+ crude oil output from November, with the bulk of the cuts delivered by Saudi Arabia and the UAE. Further production losses could come from Russia in December, when an EU embargo on crude oil imports and a ban on maritime services go into full effect. 

Russian officials have threatened to cut oil production in order to offset the negative impact of proposed price caps.
While previous large spikes in oil prices have spurred a strong investment response leading to greater supply from non-OPEC producers, this time may be different.
 
US shale producers, traditionally the most responsive to changing market conditions, are struggling with supply chain constraints and cost inflation. So far, they are maintaining capital discipline. 

This casts doubt on suggestions that higher prices will necessarily balance the market through additional supply.
“The massive cut in OPEC+ oil supply increases energy security risks worldwide. Taking into account lower demand expectations, it will reduce a much needed build in oil stocks through the rest of this year and into the first half of 2023,” the Energy Agency makes its prediction. For now, the government continues to watch the space unravel although the Ministry of Energy expects consumers to get a relief each time there is stability in the market.      

 “At least our people can get a little relief,” the Ministry of Energy and Mineral Development spokesperson, Mr Solomon Muyita, said in interview on Thursday.

He continued: “We hope nothing changes at the international scene that will temper with prices of fuel, making it harder for our people to afford it. As long as we are importing, our prices will be determined by the factors at the international market as well as forces of demand and supply here.“Coupled with speculation that some of the OPEC countries are scaling down production, it becomes difficult for us to guarantee which direction the wind will blow. However, whenever demand and supply balances out, we shall get the best prices.”

For that, Mr Muyita, believes it is too soon to “go back to pre-Covid prices in the wake of the Russia-Ukraine crisis lingering on because Russia alone contributes about 30 per cent of global oil crude oil output.  

Game of chance
When contacted for this article, the director of research and policy at Bank of Uganda, Dr Adam Mugume, said the decline in domestic fuel prices is largely a reflection of global developments. 
 
“The global economy is experiencing unusual uncertainty and it is very difficult to predict the trends in commodity prices under elevated turbulences in the global economy,” he said in an email response. 
 
He continued: “The recent decline of the global oil prices has been in part due to increased production after the oil prices skyjacked to above $120/barrel. This resulted in high cost of living in several countries, which instigated the increase oil production by the OPEC members. 

“The impact of Russia-Ukraine conflict on oil prices has eased and this combined with the waning of the Covid-19 related supply chain disruptions and slackening of the global economic growth, has contributed to the decline in the global oil prices.” 
Dr Mugume, also a seasoned economist, further noted the outlook is for oil prices to remain around $100/barrel as OPEC and other countries agreed to cut oil production. And how this will affect domestic fuel prices, he believes “will largely depend on the evolution of the exchange rate.” 

Dr Mugume also observed that if the Shilling was to weaken, even if the oil prices were to stabilise at around $100/barrel, pump fuel prices would rise.

In another interview, Dr Fred Muhumuza, Economics lecturer at the Makerere School of Economics, said: “Nobody should celebrate.” OPEC+ have since cut supply by 2 million barrels per day. 

“Winter is around the corner. The Russia-Ukraine war is dragging on and companies are looking to recover losses they made during Covid. We might see less pressure as economies reduce demand due to a recession,” said Dr Muhumuza.