Gas prices falling for three months straight, but expected to skyrocket in July

The end of 2022 was a busy year for the Ukrainian market of petroleum products. Attacks on the energy infrastructure, alienation of Ukrnafta and Ukrtatnafta, as well as waiting for the European Union embargo on oil, diesel and gasoline from Russia. These events, it would seem, were bound to lead to disaster. But while some gas stations faced temporary interruptions, others tried to increase the volume of imports in order to avoid shortages in the future.

On the one hand, the intentions of importers may seem noble. It is unlikely that Ukrainians have forgotten about the fuel shortage in Ukraine in March-June 2022. On the other hand, their investments could have easily been converted into surplus profits if the European embargo on raw materials from Russia had provoked a sharp increase in the prices of oil and oil products on the markets of Europe and Ukraine.

The worst was averted. First, the European embargo did not cause serious problems in the world economy. And secondly, as soon as spring came and the need to use generators disappeared, the consumption of oil products in Ukraine significantly decreased. As a result, fuel prices have been falling in the country for three months in a row, due to large inventories at gas stations and low consumption.

LIGA.net analyzed what is happening at gas stations, why fuel has become cheaper, and how long the price drop will last.

Saturated market

According to the A-95 Consulting Group, the cost of fuel at gas stations has decreased by UAH 5-7 per liter over the past three months. The price of liquefied gas fell the most — by 35%, and gasoline the least — by almost 10%. Diesel fell by 15%. For example, if at the beginning of January a liter of A-95 gasoline cost an average of UAH 52 ($1.41), then by the end of March the cost of fuel dropped to UAH 47 ($1.28). At the same time, liquefied gas fell in price from UAH 29 ($0.79) to almost UAH 22 ($0.60) during the same period.

Why is fuel getting cheaper? Three market participants interviewed by LIGA.net cite at least five key factors: a surplus, falling global oil prices, seasonally low consumption, large fuel reserves and dumping by Russia on the global oil market. In March alone, according to Serhiy Kuyun, director of the A-95 Consulting Group, oil prices fell from $84 to $72. In addition, according to his calculations, in two months of 2023, more oil products were imported into Ukraine than were stored at oil depots throughout the country before the invasion of the Russian Federation in the winter of 2022.

"The market is flooded now," Kuyun says.

What made the gas station accumulate large stocks? On the one hand, according to the EP, this is connected with the government's request to gas stations to prepare for February 5, when the EU embargo on Russian oil products came into effect. On the other hand, as commercial director of TD DMS-TRADE Serhiy Yermakov said, many imported resources arrived in Ukraine from the European Union with a delay: what was supposed to arrive in December, arrived already in 2023.

But in the end, this is not the only version of why gas station prices are falling in Ukraine. According to Prime gas station co-owner Dmytro Lioushkin, the accumulation of large fuel reserves in Ukraine on the eve of the European Union embargo may also be of a speculative nature. "Everyone thought that they would make money from the hype that Europe was facing a deficit," says Lioushkin. "But it didn't happen as expected. Instead of a deficit, on the contrary, there is a surplus, and now traders are selling off their fuel at a loss."

What happens next

According to Kuyun, many market participants are still selling January stocks, which businesses bought in bulk at 42-43 hryvnias ($1.14-1.17) per liter. "It would seem that 10 hryvnias ($0.27) of gas station margin per liter of gasoline is a lot. However, if you subtract from these 10 hryvnias all the associated costs, the result will be plus or minus 7.5 hryvnias ($0.20). And these are the parameters that were included in the state regulation of prices, which was in effect until May 2022," he adds.

What happens next? According to Kuyun's forecasts, over the next few weeks, fuel prices at gas stations may decrease by an average of 2 hryvnias ($0.05) per liter. However, as Lioushkin clarifies, price reductions can occur exclusively at "gas stations with a high margin", primarily at OKKO and WOG. "At gas stations with a low margin — the so-called low cost — prices have no leeway. Unless oil sinks even more," the businessman adds.

After all, there are factors in the market that can in the long run reverse the trend. In April, oil exporters from the OPEC+ group, including Russia, unexpectedly announced a reduction in oil production, starting in May, by 1.15 million barrels per day. And this, in turn, can provoke an increase in the price. According to forecasts of economists interviewed by Reuters, in the second half of 2023 world oil prices may jump to $90 per barrel.

"If you calculate roughly, then every plus or minus $4 per barrel of oil is plus or minus one hryvnia per liter of fuel at the gas station," Lioushkin explains. He estimates the time lag between the change in the price of oil and the revision of prices for petroleum products at the gas station from five days to two weeks.

At the same time, even if these forecasts do not come true, the increase in gas station prices cannot be avoided. From July, according to MP from the presidential faction Danil Getmantsev, the Verkhovna Rada may hike up VAT on fuel from 7% to 20%, as it was before the war. Also, the payment of fuel excise tax should be fully resumed from July. Under this scenario, according to the calculations of Kuyun from the A-95 group, gasoline at gas stations will become more expensive by 11.20 hryvnias ($0.30) per liter, diesel fuel by 7.70 hryvnias ($0.21), and the price of a liter of automobile gas may jump by 2.60 hryvnias ($0.07).