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Domestic product pricing

Renaissance Capital

20 June 2019

Russian oil & gas

With no physical barriers to exports, the domestic oil product market is clearly very lucrative. As evidenced by Figures 118-119, domestic refined product prices have unquestionably mirrored dynamics in global crude and product markets. In particular, gasoline and diesel prices reached all-time highs of $926/t and $941/t, respectively, in summer 2008, before plummeting to just $324/t and $371/t, respectively, by January 2009 (see Figure 119). Since the January 2009 lows, gasoline and diesel prices have continued their volatility, reaching lows of $272/t and $308/t in January 2016, respectively, but recovering 63% and 72% since.

Domestic oil product market is driven by international dynamics

Figure 118: Domestic gasoline and diesel prices, $/t, net of VAT and excise

Figure 119: Domestic vs export product basket values, $/bl, net of VAT and excise

Gasoline

Diesel

140

Domesic product basket

1,000

900

120

800

700

100

600

80

500

400

60

300

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20

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-05 -05 -06 -06 -07 -07 -08 -08 -09 -09 -10 -10 -11 -11 -12 -12 -13 -13 -14 -14 -15 -15 -16 -16 -17 -17 -18 -18 -19 -19

0

Jul

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Jan-05

Jul-06 Jan-08

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Jan-11 Jul-12 Jan-14

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Source: InfoTEK, SPIMEX, Renaissance Capital

Source: InfoTEK, SPIMEX, Renaissance Capital

From the beginning of 2011, the government began applying pressure on domestic product prices. 2011-2012 saw the value of the domestic product basket diverge significantly from the export basket value, though trends were then largely parallel until 2014 (as shown in Figure 120). Since that time, the reduction in international oil and product prices, combined with upgrades of Russian refining capacities and the associated tax manoeuvre, has helped the domestic product basket to again equalise with its export value. The rebound in international oil prices has met with further constraints on domestic prices in 1H18 and culminated with the government’s decision to introduce a so-called dampening mechanism via a combination of reverse (negative) oil excise and price dampers to keep a lid on domestic price growth. We discuss this mechanism in detail on pages 161-163. As a result, the domestic basket was up only 20.4% in 2018, while the export product basket was up 23.3%.

Russia’s integrated oils face significant economic barriers (in the form of export duties and transportation costs) in displacing excess products (diesel and fuel oil, mainly) from the domestic market, although these continue to be compensated for, currently, by the reduced level of export duty vs crude as well as the reverse oil excise from 1 January 2019. There is also, from time-to-time, significant political pressure to rein in product prices and this has certainly featured significantly in recent times, particularly with the introduction of the dampening mechanism.

Figure 120 shows export margins for the three principal refined products in comparison to crude oil. These subtract from Mediterranean prices the high cost of displacing products and the export duties levied on the way out.

Barriers to displacing excess products are economic, not physical

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Figure 120: Crude and refined product export margins, $/bl

Crude

Gasoline

Diesel

Fuel oil

30

20

10

0

(10)

(20)

(30)

(40)

(50)

(60)

(70)

Jul-05

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Note: West Mediterranean quotes.

Netback calculated after cif-to-fob adjustment, export duty, and typical transportation costs from Perm to Novorossiysk for gasoline and diesel and from Nizhny Novgorod to St. Petersburg for fuel oil.

Source: Bloomberg, InfoTEK, Renaissance Capital

Renaissance Capital

20 June 2019

Russian oil & gas

These margins diverged significantly in 2018, indicating that the domestic sales channel diesel and fuel oil was generally more profitable than the export channel, while the opposite was true for gasoline in the wake of growing price controls. In particular, the premium for the domestic diesel price over the export netback declined to $3.5/bl in 2018 (vs $4.4/bl in 2017). Gasoline, which is a more widely available product, turned into a large discount of $6.6/bl in 2018 (vs a small discount of $0.8/bl in 2017). Some oversupply in fuel oil continues, but this has become a less pressing issue with recent refinery upgrades. Low domestic demand and the generally reduced availability of the product

(Russia is the world’s largest exporter of fuel oil) helped to maintain a positive export margin of $0.3/bl in 2018 (vs $6.3/bl in 2017).

Domestic diesel sales remain more profitable than exports; unlike gasoline and fuel oil

116