Business

Oil prices plummet but Govt. unmoved on fuel prices

By Madhusha Thavapalakumar

China is the world’s largest oil importer but has restricted passenger travel to control the coronavirus outbreak, leading the OPEC to lower its 2020 demand forecast and resulting in a rapid drop in oil prices.

Despite an over 10% and over 20% drop in global oil prices since early January, the Government has opted to maintain the current fuel prices until and unless the world prices reduce further in the weeks ahead.

Global oil prices have been on a declining trend amidst the coronavirus pandemic and the Singapore Platts price of a barrel of petrol and a barrel of diesel recorded a drop of over 10% and 20%, respectively as of Wednesday (12) from their prices early this year.

However, issuing a press release on Friday (14), Minister of Transport Services Management and Power and Energy Mahinda Amaraweera noted that the recent drop in global oil prices is not sufficient to reduce local oil prices.

“Due to the hike in global oil prices reported two weeks ago, local prices of petrol and diesel were supposed to be increased by Rs. 12, but the Government did not do that. The current drop in global oil prices is not permanent. It’s a short-term drop,” the release added. He added that benefits will be passed on to the public only if the declining trend or reduced prices prevail in the long term.

China is the world’s largest oil importer but has restricted passenger travel to control the coronavirus outbreak, leading the OPEC to lower its 2020 demand forecast and resulting in a rapid drop in oil prices

Since the latest fuel price revision carried out by the former Government on 10 September 2019, the Singapore Platts prices of petrol and diesel dropped by over 7% and over 13%, respectively as of Thursday (13), with several price surges during the period in between.

During the last revision, prices of local oil were reduced, reflecting the reduction in global oil prices at the point. Accordingly, the price of a litre of 95 octane petrol was reduced by Rs. 2 to Rs. 161, 92 octane petrol by Rs. 1 to Rs. 137, and super diesel by Rs. 2 to Rs. 132, while the price of a litre of auto diesel remained at Rs. 104.

This was the last time fuel prices were revised and was also the last time the revision was done according to the fuel pricing formula, as the current Government’s stance on abolishing or continuing with the fuel price formula remains vague.

In October and November, the last two months under the previous Government, fuel prices were not revised despite the fluctuation in global oil prices. Since the date of the last revision to 10 October, Singapore Platts’ price of a barrel of petrol reduced by over 1% to $ 67.50 from $ 68.40, while diesel was reduced by 2.5% to $ 73.74 from $ 75.69.

From 10 October to 10 November, Singapore Platts’ price of a barrel of auto diesel was further reduced by 3% in the global market as it went down to $ 71.37 from $ 73.74, while a barrel of petrol increased by over 7% from $ 67.50 to $ 72.35.

This was due to a missile attack on an Iranian state-owned oil tanker off the coast of Saudi Arabia on 11 October last year.

In December, the third month without a local fuel price revision, Singapore Platts’ price of a barrel of petrol reached its peak level of the month on 27 December to $ 74.15, while the price of a litre of diesel reached its peak level on 30 December which was $ 80.04. These prices were substantially higher compared to September prices.

This was mainly due to escalated tensions between the US and Iraq during the month of December. Following the death of a US military contractor in a rocket attack on 27 December last year, the US launched retaliation on 29 December against an Iraqi militia, backed by Iran.

Retaliation attacks continued to happen as tensions between the US and Iran were gradually increasing. As a result, on 3 January this year, the US launched a drone attack outside Baghdad International Airport in Iran, which killed Iran’s most powerful military commander, Maj. Gen. Qasem Soleimani.

Soleimani’s killing led to a major escalation in tensions between Washington and Tehran. Tensions continued to prevail in the subsequent days and as a result, Singapore Platts’ price of a barrel of petrol, which was $ 71.50 on 2 January, gradually increased to $ 74.90 on 6 January, while a barrel of diesel reached $ 81.44 from $ 78.74 on 2 January.

This trend saw a reversal of it following the coronavirus outbreak that came to global limelight in January this year. Driven by a comparatively lower demand of oil owing to the restricted travelling in China, as of Wednesday (12), global oil prices witnessed a double-digit drop from their early January levels.

Singapore Platts’ price of a barrel of petrol was $ 63.70 on 12 February, which is a drop of over 20% from 6 January prices. The price of a litre of diesel was decreased by over 20% as it reached $ 65.13 per barrel from $ 81.44 on 6 January.

Amidst the growing concerns surrounding the coronavirus outbreak in China, the world’s biggest oil importer, the Organisation of the Petroleum Exporting Countries (OPEC), lowered its 2020 demand forecast for its crude oil by 200,000 barrels per day (bpd) on Wednesday (12).

China is the world’s largest oil importer but has restricted passenger travel within the country as well as to and from the country, as quarantine measures are ongoing in a number of areas inside China.

As of Friday (14) noon, China reported 121 more deaths from the coronavirus outbreak, 116 of which are from the epicentre of the outbreak which is the Hubei Province. At least 1,488 of the total number of deaths were reported so far across the country. Nationwide, there are 5,090 new identified cases, pushing the total number to nearly 65,000 as of Friday (14).

Oil refiner China National Chemical Corp said on Thursday (13) that it would close a 100,000 bpd plant and cut processing at two others amid falling fuel demands.

The International Energy Agency expects oil demand in the first quarter to fall for the first time in 10 years before picking up in the second quarter. The agency cut its full-year global growth forecast to 825,000 bpd.

Fuel price formula

As exclusively reported by The Sunday Morning Business on 5 January this year, under the headline “Fuel formula ‘U’ turn?”, the Government was said to continue with the fuel pricing formula despite earlier claims to the contrary, made both prior to and following the presidential election in November.

However, it still remains unclear whether the new Government is going to proceed with the formula as February is the fifth month in a row where fuel prices were not revised, reflecting the fluctuations in the global oil market.

In May 2018, the then Government brought in a fuel pricing formula that would be revised on the 10th of each month, reflecting fluctuations in the global oil market.

The purpose of the formula was to eliminate ad hoc price revisions driven by political needs as opposed to economic needs, establish cost-based pricing, reduce losses suffered by the State due to low fuel prices, and also protect the loss incurred by state-owned Ceylon Petroleum Corporation (CPC).