The Deputy Prime Minister Alexander Novak's statement regarding a "slight fuel deficit" has generated significant media interest. This has promptly led to discussions on the closure of independent petrol stations and the rising wholesale and retail prices of petrol and diesel. Strikingly, no one has pointed out that Novak referred to a slight deficit in the production of petroleum products, and his subsequent phrase was, “which is covered by accumulated reserves.” It is also worth recalling that the early signs of a fuel crisis became evident earlier this year, in August, when discussions of a gasoline production deficit could only be theoretical, contemplating potential risks. However, it was then that the exchange prices of petrol saw a sharp increase. As for the diesel fuel deficit, it is hardly a topic of discussion even now, with production in Russia being twice that of consumption. Yet, diesel prices have been rising on the exchange since the beginning of September. Naturally, following the wholesale price increase, retail prices at petrol stations have also adjusted with a slight lag. The reasons for the price rise in petrol have outstripped inflation (8.4% versus 4.16% as of September 22), and diesel has increased by 1% in just one month (3% since the beginning of the year). If this trend continues, diesel will also outpace consumer inflation by November, largely due to the sharp increase in wholesale prices, which are closely linked to exchange quotations. Petrol stations must source their fuel somehow, and the only places they can obtain it are exchanges or oil depots. Larger networks owned by oil companies can purchase fuel directly from refineries (refining plants), but again, its price is affected by exchange rates. Exchange trading is influenced by several factors, including potential risks, the informational background, supply volumes, macroeconomic conditions, and quotations, among others. Since early August, the rise in quotations has been driven by unscheduled refinery maintenance due to drone strikes and the persistent risk of oil companies losing budget compensation for keeping wholesale fuel prices on the domestic market below export levels (the dampening mechanism). The latter is connected to the fact that in August, the exchange quotations for AI-92 petrol (which acts as a dampening measure for petrol) surpassed the threshold level after which the dampening is nullified (66,495 roubles per tonne, whereas AI-92 is currently trading at 73,821 roubles per tonne). The question remains: why have quotations risen so steeply? Yuri Stankevich, Deputy Head of the State Duma Energy Committee, notes that the profitability of oil refining this year is low. Overall, vertically integrated oil companies (VIOC), which manage the entire production chain from oil extraction and refining to the sale of finished fuel at their petrol stations, expect their profits to halve this year compared to previous figures. The reduction in production alongside rising production costs, tax burdens, and excise taxes has created the conditions for an "ideal storm," which has manifested in the prices seen on exchanges and at retail outlets. Experts believe that a ban on diesel exports will help curb price increases. However, it should be noted that the deficit concerns only petrol. The rise in both wholesale and retail diesel prices is exclusively related to seasonal factors (demand typically increases in autumn) and the issues surrounding the profitability of oil refining and retail trading. The reported closures of petrol stations in various regions are more likely linked to negative trading margins rather than a complete lack of fuel at these outlets. According to Dmitry Gusev, Deputy Chair of the Supervisory Board of the Reliable Partner Association and member of the expert council for the "Petrol Stations of Russia" competition, even if there is currently a production deficit in the market, it is always compensated by reserves built up during winter and spring. However, this year, building such reserves was quite challenging, as petrol prices did not rise in spring (there was no incentive to purchase and hold in anticipation of selling at a higher price), while interest rates were relatively high. Nevertheless, the fundamental problem within the fuel market is the low profitability of operations. There are no incentives to construct new refineries and petrol stations, no overarching plan for petrol station placements, and the industry's investment attractiveness leaves much to be desired. In response to the rising prices, the government has already announced the extension of a complete ban on petrol exports until the end of the year and a prohibition on diesel exports for non-producers (traders). Additionally, to maintain dampening payments for vertical integrated oil companies, there are plans to raise the upper limit of quotations, beyond which such payments are nullified, by 10% for both petrol and diesel. Sergio Frolov, managing partner of NEFT Research, asserts that the export ban will help to keep diesel prices in check since all volumes currently exported by non-producers will be redirected to the domestic market. However, for petrol, there is unlikely to be any significant influence; imports will likely be necessary to cover local deficits (especially in the South and the Far East). Sergio Tereshkin, director of the OPEN OIL MARKET fuel marketplace, agrees that merely banning exports will not be enough to resolve the crisis. There must be an increased supply in the domestic market, which could include imports from Belarus, Kazakhstan, and several other countries. Stankevich points out that directive restrictions won't result in increased fuel availability in the market unless refineries promptly complete their unscheduled repairs. For this reason, all possible measures must be taken to safeguard these facilities from further drone attacks. Once there is a return to a stable surplus of petrol and diesel in the market, exchange prices are likely to decrease. He expresses optimism that this downward trend will start to emerge in October. In the coming month, prices are expected to stabilise at roughly the same levels seen currently. The sole systemic solution lies in the completion of the refinery modernisation programme, which would help increase petrol production volumes. Concurrently, a military resolution to protect refineries has long been necessary, Frolov asserts. From Tereshkin's perspective, the primary challenge of the current crisis lies in the risks associated with petrol shortages due to enforced repairs at refineries. The timelines for these repairs remain unpredictable, complicated by sanctions from the US and EU restricting the supply of equipment to Russia, the expert explains. Regarding the dampening mechanism, Stankevich believes that the decision to revise it comes rather late. However, better late than never. The profitability of oil refining is directly tied to receiving a reverse excise. Amendments to the Tax Code will allow the government to remain aligned with promises to keep retail prices in line with inflation levels. Yet, it is already clear that in 2025, prices will likely exceed the upper threshold level set by macroeconomic forecasts. Moreover, it is important to note that currently, AI-92 quotations stand above the potential upper limit for dampening payments (72,740 roubles per tonne). Diesel quotations are close to this threshold (74,360 roubles per tonne, currently at 70,400 roubles per tonne). Payments are calculated based on the average monthly value. How oil companies will respond if, based on the end-of-month calculations, even with adjustments, the dampening is nullified remains uncertain. It is also unclear when changes to dampening calculations will take effect, whether from August 1 or September 1. Should it be from September 1, oil producers will not receive payments for August. According to Gusev, considering that more than five years have passed since the introduction of the dampening mechanism and the agreement between the government and oil producers to moderate petrol station prices within inflation limits, much has changed, and it is worth discussing new operational rules. Given the altered conditions both globally and domestically, it is critical to acknowledge that the system has become ineffective and that a new framework should be developed involving all market participants. Source: RG.RU