Oil firms keep pumping up fuel prices despite falling demand

Newsroom 20/09/2010 | 17:05

The soaring cost of fuel looks unlikely to level off any time soon. Since the beginning of the year major oil producers active on the local market have repeatedly raised prices because of low demand and the uncertain fiscal environment. But specialists expect the price to remain below RON 5 per liter for the most common fuels.

Dana Ciuraru

 

Recently, oil and gas company Petrom started an advertising campaign offering 40 percent off all fuel purchases made at different Petrom filling stations for one hour.

The result was reminiscent of communist queues, when people had to stand in line for hours simply to buy yogurt or meat. “When the campaign reached our filling stations a line started to form here, at the Mihai Bravu filling station, and went all the way to Bucharest Mall in the Vitan area. First in line were those with SUVs,” a worker from the Mihai Bravu Petrom gas station told BR.

A 40 percent discount is a temptation for any driver, as fuel prices seem to have gone into overdrive lately. Market sources indicate that the prices at Petrom stations have been changed 20 times since the beginning of the year. Petrom officials told BR that due to the 49 percent rise in the price of crude in H1 2010 from the same period of 2009, the price of fuel had registered a hike of 28 percent for gas and 23 percent for diesel oil (expressed in USD). The price increases take the cost of fuel to more than EUR 1 per liter.

 

Price up, demand down

Companies have hiked prices even though all oil companies experienced a 6 percent decrease in demand in H1. And it is likely that the figure could reach 10 percent over the course of the year due to the austerity measures taken by the government, which include wage cuts and layoffs in the public sector.

For instance, Rompetrol announced that total fuel sales in Q1 reached 640,000 tons, down by approximately 16 percent compared to the same period of 2009, with a total quantity of processed raw materials of 950,000 tons.

However, the entire Rompetrol distribution segment – which consists of Rompetrol Downstream, Rom Oil, Rompetrol Logistics and Rompetrol Gas – registered a turnover increase of 31 percent, namely USD 450 million, in Q1, as well as a positive operational result (EBITDA) of approximately USD 7 million, down 26 percent compared to Q1 2009.

“The positive results have been supported by our strategy to expand our own distribution and operational activity optimization network. Thus, Rompetrol Downstream operates 805 distribution stations, 25 percent more than in Q1, 2009,” said Rompetrol officials.

The total volumes sold through the distribution segment (retail, wholesale and partner network) fell by approximately 2 percent, to 276,000 tons, underpinned by a 6 percent growth in the wholesale segment, while the retail area registered a decline of 8 percent.

Elsewhere on the market, MOL Romania, the local branch of Hungarian petroleum group MOL, posted a decline in volumes of fuel sold by 4.5 percent in the first three months, compared with same period last year, as a result of the falling number of gas stations, as well as lower domestic demand. “Besides the unfavorable economic context, the demand was also influenced by record oil prices and the increase of excise duties in some countries,” said MOL Romania representatives.

Petrom representatives also announced that, according to their estimates, the fuel market in Romania has decreased by about 12 percent in H1, 2010 compared to same period of last year, mainly due to the difficult economic context and of government measures to increase efficiency. “The retail segment has decreased by 7 percent over the same period, while on the commercial segment the market decline was 18 percent, compared with the first six months of 2009,” said Petrom representatives.

They added: “In the coming period we expect the fuel market to remain under pressure, in line with the development of the Romanian economy, and for the retail segment, we anticipate a decrease in consumption of about 10 percent in 2010.”

Company officials say that the consumption decrease affected fuel sales but no decision has been made yet to close filling stations. Moreover, Petrom representatives told Business Review that the firm will open two new filling stations by year-end, representing a total investment of EUR 4.9 million.

 

Uncertain outlook

Globally, in 2010, the major players in the market expect oil prices to remain volatile, with trading conditions broadly within a range of USD 70-85/bbl. Given the existing turbulent economic environment, the EUR is tipped to be slightly weaker versus the RON and USD.

The market for refined products is forecast to remain challenging throughout 2010, despite the recovery witnessed at the beginning of the year. Marketing volumes and margins are expected to remain under pressure until the broader economy shows clearer signs of improvement.

In Romania, following the implementation of a package of austerity measures by the government, the contraction in both private and public sector consumption is now expected to be much deeper. This will negatively affect GDP growth, which could contract by some 3 percent this year. Furthermore, the VAT rise in July could have a significant effect on private sector consumption.

The labor market outlook continues to be difficult as economic recovery looks unlikely to occur until next year. To help protect the company’s cash flow in 2010, Petrom announced that it had entered into crude oil hedges in Q2/09 for a volume of 38,000 bbl/d, securing a price floor of USD 54/bbl via the sale of a price cap of USD 75/bbl (zero cost structure).

“We will continue our sizeable investment program, with a planned RON 6.9 billion investment for OMV Petrom this year. Furthermore, we will proceed the implementation of a share capital increase of up to EUR 600 million as authorized by our shareholders on April 29, 2010, whilst pursuing alignment with the state’s initiative to sell part of its stake in Petrom (11.84 percent),” said representatives of Petrom.

Market specialists say they do not expect the price of fuel to exceed RON 5 per liter. “I think we will see a maximum of RON 4.5 to 4.6 per liter on diesel – that’s if we’re talking about a normal economic context,” said Andrei Chirilescu, deputy general manager at Lukoil Romania, a company which operates about 300 gas stations on the local market.

 

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