Fuel prices deregulated — when fuel to appear at filling stations

Author

Valery Moiseev

Today, on May 19, the Cabinet of Ministers published Decree No. 594 of May 17, which stopped the regulation of fuel prices in retail chains. Earlier, First Deputy Prime Minister — Economy Minister Yulia Svyrydenko said that the government had decided to abandon state regulation of fuel prices for two months. At the same time, she expects that the cost of diesel fuel (DF) at filling stations will not exceed 58 UAH/l, and of gasoline — 52 UAH/l.

Reasons for current fuel crisis

In the past few weeks, there has been an acute shortage of fuel at filling stations in all regions of Ukraine. The main reason for the current fuel crisis is war. The largest Kremenchuk oil refinery and other processing capacities of the domestic market, which supplied up to 18% of consumption before the war, were destroyed.

Ukraine imported another 82% of oil products by four modes of transport: road, rail, sea, and pipeline ones. Now these supply chains have either practically halted, or they work in a completely different way. In addition, the main fuel imports came from the Russian Federation and Belarus or in transit through Belarus. Since the beginning of the war, these directions have been completely closed.

The most important reasons for the fuel shortage in Ukraine:

loss of almost all previous channels for supplying fuel to the market;
destruction of a large number of tank farms, loss of stocks;
growth in consumption by the defense forces, the State Emergency Service, paramedics, etc.;
staff reduction at market operators, especially an acute shortage of fuel truck drivers.

There are also assumptions in social media that the market operators themselves had a hand in the deficit because they wanted the abolition of state price regulation and more earnings. Probably, there's a little bit of that, too. But the impact of objective factors that we have mentioned above is much stronger.

What government does to reduce fuel shortages

On May 13, the Ministry of Economy announced that Ukraine would get 350,000 tons of fuel through "completely new logistics routes" in May. To this end, measures were taken in March-April to increase the daily volume of fuel imports from the EU from 4,000 tons to 12,000 tons per day:

entry permits for tank trucks delivering fuel to Ukraine were canceled;
accepting fuel in the ports of the Danube was provided;
changes were made to the mechanism of price regulation of the fuel cost;
out-of-turn clearance of fuel at the borders by customs and border guards was ensured.

"The railroad began to deliver 5 times more fuel. In March, 35,000 tons were delivered, in May we expect 180,000 tons. Road imports increased 15 times — from 5,000 to 85,000 tons. River transport now transports 5 times more fuel compared to March — from 4,000 to 22,000 tons," Svyrydenko noted.

There is also an agreement to start reversing fuel through a pipeline from Hungary. Ukraine obtained confirmation for the import of 35,000 tons per month, with a potential increase to 50,000 tons.

In order for queues and shortages to disappear, there should be a reserve of fuel enough for at least 15 days at filling stations, the Ministry of Economy believes.

According to the Ministry forecast, consumption of 300,000 tons of diesel fuel and 120,000 tons of gasoline is expected in May. Such a volume of imports has already been contracted by Ukrainian chains.

How operators assess situation on fuel market

The largest market players and experts are ambiguous about the effect of abolishing state regulation on the processes of fuel supply at filling stations. Some of them believe that the main reason for the empty filling stations is the lack of fuel. And abolishing state regulation of prices cannot impact it.

This is confirmed by the discussion that took place on May 16 at a meeting of the Verkhovna Rada Committee on Energy, Housing and Utilities Services.

For instance, OKKO Vice-President Yuriy Kuchabskyi noted that "state regulation of prices in no way hinders supplies to Ukraine. The formula for determining the marginal price does not prevent the import of petroleum products."

The main problem, according to him, is not the price, but the logistical difficulties of delivering fuel to Ukraine. "There will be a shortage until additional supply routes are developed and oil depots are not built near the border with the EU," Oleksandr Melnychuk, Director for Strategic Development at the BRSM-Nafta chain, agrees.

"We have agreements that the volume of supplies from Romania will be increased by 30% and from Poland — by 3-4 times," Kuchabskyi said. Additional volumes are supplied through Slovakia and Hungary. "If supplies through these directions work well, then we will resolve the situation by the end of May," he assured.

The abolition of state regulation may lead to higher prices, and the deficit will remain, Nelia Pryvalova, head of the Ukrainian Oil and Gas Association, believes. "It will get a little better with supplies, but if it was done in early April, then we would have a better situation."

Mykhailo Romaniv, Commercial Director at WOG, says that the abolition of price regulation would allow his chain to increase imports. Filling station chains often bought oil products in Europe under spot contracts, prices for which were already above the marginal cost in Ukraine. Because of this, they did not import all the fuel resources available on the foreign market.

The abolition of state regulation can settle the rush demand by means of high prices, Kuchabskyi believes. The OKKO chain, he said, now sells more fuel than before the war. "Twice as many clients want to fill up their cars with us, we just can't refill our filling stations fast enough."

What fuel prices will be

Market participants doubt that filling station prices will not exceed the levels expected by the Ministry of Economy.

At a meeting in the VR Committee, the head of one of the chains said: "Try to buy 95 gasoline for less than 40 UAH in Europe now. There is also a shortage there. Intermediaries set a surcharge of $150–250 per ton. And the fuel still needs to be delivered."

The outlet ZN.ua reports that the filling station chains have begun to conclude the first agreements for supplying fuel without regulation, and publishes one of the distributor's proposals for the supply of fuel in small wholesale. According to it, even the small wholesale prices exceed the retail price guidelines recommended by the government. Taking into account the markup of filling stations, prices will be 60–72 UAH for diesel fuel and 55–65 UAH for A-95 gasoline.

When shortage of fuel at filling stations will pass

The shortage of oil products will persist until the end of 2022 due to limited logistics capabilities with their delivery to Ukraine, Oleksandr Melnchuk believes. His words are given in a press release from BRSM-Nafta dated May 18.

"There will not be enough fuel. Its availability will be at the level of 40% of the pre-war level. Because it is physically impossible to fully provide Ukraine with the necessary volumes of fuel," Melnychuk said.

He expressed doubt that abolishing state regulation of prices would lead to a reduction in the shortage of oil products. "Price regulation does not impact the amount of fuel inside Ukraine in any way."

As of May 18, BRSM-Nafta obtained the necessary permits to go abroad for all 70 fuel trucks from the company's fleet. "The same situation is with our colleagues from other chains. Now we can import 20% of the volume that our network sold before. The movement began, and the fuel began to reach central Ukraine. Previously, it reached a maximum of Rivne. Fuel trucks from Poland and Hungary were unloaded in the Lviv and Zakarpattia regions," Melnychuk explained.

BRSM-Nafta also delivers fuel to Kharkiv and Chernigov, where "it is critically important for the Armed Forces of Ukraine."

"We are now supplying diesel fuel to Kyiv, we hope to arrange supplies of 95 and 92 gasoline within a week. We are trying to arrange deliveries to Mykolaiv. We hope to start deliveries to the Dnipro in two weeks," Melnychuk said.

This will help relieve some of the tension, but it won't solve the problem.

On May 18, it was reported that Poland would provide Ukraine with 25,000 tons of gasoline from its stocks. This was reported by Yulia Svyrydenko, who met in Kyiv with the Polish Minister of Climate and Environment Anna Moskwa. Supplies will start from the beginning of next week.

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Director of the Consulting Group A-95 Sergei Kuyun noted: "Ukraine is the first country in Europe that was deprived of Russian energy resources. We now see from our own experience how difficult it is to do this and how difficult it is for others to decide on an embargo, since no country in Europe has the experience of 100% reorientation to new sources of supply."