The Ministry of Finance is prepared to ease the regulations governing budgetary compensation payments to oil companies for maintaining wholesale fuel prices below export levels (the damping mechanism). The Ministry agrees to raise the allowable deviations in fuel market quotations for accessing the damping mechanism by 10 percentage points—up to 20% for petrol and 30% for diesel—against the indicative prices set by the state for the year (60,450 roubles per tonne for petrol and 57,200 roubles per tonne for diesel). Currently, the permissible deviations stand at 10% and 20%, respectively. Under existing conditions, oil companies will not receive compensation for August and September (based on the outcomes of the first 15 days of the month). The proposed changes are likely to be applied retroactively from August or September this year. Notably, in the last month of summer, the average stock market price for AI-92 petrol (the basis for damping calculations for petrol) exceeded the values defined in the tax code. To qualify for damping compensation for August, it would have sufficed to raise the threshold for quotations by 5%. However, in September, prices surged beyond that threshold, hence the discussion now pertains to a 10% increase. According to current regulations, the damping mechanism nullifies if the average monthly price for AI-92 petrol exceeds 66,495 roubles per tonne, and for diesel fuel, if it surpasses 68,640 roubles. Should the threshold be increased to 20% and 30%, the cap prices would then rise to 72,540 and 74,360 roubles, respectively. At present, AI-92 is traded at 73,144 roubles, which is already above the yet-to-be-adopted new threshold for receiving damping compensation. However, Sergey Frolov, managing partner at NEFT Research, suggests that stock prices are likely to begin a steady decline from late September, attributed to a seasonal drop in demand. Broadening the boundaries for receiving damping compensation will also contribute positively to normalising the market situation. Thus, if the measures proposed by the Ministry of Finance are enacted retroactively from August, oil companies will not lose out on compensation. While one might argue that the majority of our country's residents may not be concerned with oil companies' profits, the nullification of the damping mechanism could lead to increased fuel prices at wholesale first, before spilling over into retail prices. This is due to the fact that petrol and diesel are export commodities, tethered to international market prices. The damping mechanism serves to keep domestic fuel prices lower than export levels and mitigates fluctuations in global oil and petroleum product prices. Yuri Stankevich, Deputy Chairman of the State Duma Committee on Energy, points out that today, the dynamics of stock market prices are primarily influenced by limited supply from major fuel producers, causing heightened demand. Consequently, both the Federal Antimonopoly Service and stock market regulators are manually adjusting trading rules to synchronise the operations of all market participants in the oil product supply chain, from well to petrol station, while attempting to eliminate the impact of speculative factors on pricing. Reevaluating the parameters of the damping mechanism will enhance the economic performance of oil refining, which will positively affect both stock market and wholesale prices. As noted by Dmitry Gusev, Deputy Chairman of the Supervisory Board of the "Reliable Partner" association and member of the expert council of the "Russian Petrol Stations" contest, expanding the range for allowable deviations in stock market quotations aims to improve the profitability of oil refining compared to export and simultaneously enhance the attractiveness of domestic market supplies. Until there is a legislative priority for domestic market supplies in the context of assessing export alternatives, this measure remains the only option. Moreover, as emphasized by Sergey Tereshkin, director of the OPEN OIL MARKET fuel marketplace, the indexing of the damping ceiling would occur regardless—it happens annually in January. However, it is essential to prevent a reduction in fuel output on the market. This issue has become a top priority for regulators. In August, the stock market prices for petrol exceeded the upper limit for budget compensation payments to oil companies. Two questions arise in this situation: how will this affect petrol and diesel prices at petrol stations and will there be a repeat of uncontrolled growth in stock market quotations? Frolov believes that extending the allowable ranges of deviation will not significantly impact retail prices but will contribute indirectly to an increase in petrol station margins, which currently sit at a critical level. Tereshkin, on the other hand, holds a different view, asserting that changing the damping boundaries will solidify stock prices for AI-92 petrol above 70,000 roubles per tonne, considerably higher than the existing threshold. This change will reduce the profitability of independent petrol stations not incorporated within vertically integrated oil companies (covering the entire production chain, from oil extraction and refining to retail fuel sales). Consequently, high rates of retail price increase will persist even after the traditionally "hot" summer season concludes, as petrol station owners will need to incorporate rising procurement costs into final prices for consumers. According to Gusev, petrol stations are mere bystanders in this process, with no input. Frankly, it isn't evident that they wish to voice any concerns, notes the expert. Independent petrol stations and their associations have 'retreated into the corners' and are neither ready to adapt nor to fight back. Consequently, regulators are altering the market as they see fit. As for the second question, experts agree that merely broadening the ranges for damping compensation payments will not systematically resolve the issue. Frolov is convinced that crises will continue each year until the modernization program of oil refineries—allowing for increased domestic petrol production—is completed. Moreover, he believes that manual management and the ineffectiveness of the damping mechanism under changing external conditions must be revised, though it is unlikely such changes will occur in the current environment. Stankevich also notes that the damping mechanism, in its current form, does not strike a balance between economic efficiency in oil refining and predicted dynamics in retail pricing. Furthermore, administrative price regulation exacerbates the situation under non-standard circumstances. He argues that industry participants must synchronize their positions on a broad range of issues, from taxation to territorial development of the retail network, and these issues should form the basis of a dialogue agenda with the government. From Gusev's perspective, it is time to shift towards direct state regulation of fuel prices. At least until the completion of the Special Military Operation, all domestic commodity trading should be suspended, setting ceilings on wholesale, small wholesale, and retail prices, the expert states. After the operation concludes, it may be possible to re-engage with market dynamics if so desired, concludes the expert. The Ministry of Finance and the Ministry of Energy did not respond to a request from "RG". Source: RG.RU