The Independent Consumer and Competition Commission (ICCC) is of the view that crude oil prices will continue to fluctuate in the remaining months of 2019 through to 2020 but gently towards a downward path.
Making reference to a short-term forecast from Oil Crude Price.Com, the ICCC stated that global crude oil price could average $64.93 per barrel in 2019 and $65.19 per barrel in 2020.
As crude oil is used to produce petrol, diesel and kerosene among other petroleum products, retail price movements for these petroleum products are mainly dictated by crude oil price movements. Crude oil price movements are mainly dictated by the following:
- Demand for oil by the major oil consuming economies such as China, India, and the United States. When shale oil production is low, the US usually becomes a major oil consumer;
- Supply of oil from the major oil producers such as the Organisation of Petroleum Exporting Countries (OPEC) and Russia and the US. US is leading shale oil producer and its shale oil stock also has a major impact on global oil prices; and
- Geopolitical and trade issues have a major impact on global economic activities, thus they also have a major impact on oil prices. This is the case where geopolitical and trade issues affect the production, supply and trading of oil.
ICCC Commissioner and Chief Executive Officer, Paulus Ain added that Papua New Guinea does not have any influence in the international oil market and therefore, any developments in relation to the global supply and demand of oil will have an impact on the future oil prices and eventually on the movements of retail fuel prices in the country.
“While the ICCC is responsible for setting the annual wholesale and retail margins, and the monthly fuel prices in the country, it does not have any control over several components that feed into the retail price build-up.”
These components that Commissioner Ain was referring to were;
- Import Parity Prices (IPP) which is mainly influenced by the Mean of Platts Singapore (MOPS) prices for petrol, diesel and kerosene, and the PNG-kina US dollar exchange rate. The MOPS price movements are mainly influenced by international oil price movements. Nevertheless, the IPP usually accounts for 50-60 % of the monthly retail prices and is usually a pass through cost in the retail price build-up; and
- The domestic road and sea freight rates are also pass through costs in the retail price build-up. For centres like Kavieng, the total freight can be as high as 30% of the final retail price.
Commissioner Ain explained that the OPEC bloc have long dictated global crude oil prices, while the US emerged over time as a significant producer of shale oil but recent years, oil production from the US has risen sharply, surpassing Russia and all other oil producing countries.
“In May 2018, the United States pulled out of the 2015 Iran Nuclear Deal, subsequently targeting Iran with economic sanctions that affected the country’s energy sector, and further restrained other countries from trading with it. By October, the US granted waivers to eight countries to resume import of Iranian oil but then, Iraq already had a huge stockpile of oil inventory.”
“These political measures pushed up crude oil prices to a peak of $82 per barrel in September 2018; as OPEC countries and Russia continued producing high volumes. By October 2018, the global oil market was saturated with excess supply, mostly from Iran and the US. The supply glut caused a dip in crude oil prices in the last quarter of 2018, forcing prices to fall significantly, from an average high of $82 per barrel in October down to $50 per barrel in December.”
“To drive up oil prices, OPEC and Russia (OPEC+) made an agreement in January 2019 for member countries to reduce crude oil production to 1.2 million barrels per day (bpd) through to June.”
“The OPEC-backed supply cuts have led to price increases in the early months of 2019, and markets have been further tightened by US sanctions against oil exports from Venezuela. However, the strong responsiveness of shale oil from US to patch up the supply gap apparently has kept global prices within a narrower band than has historically been the case.”
Commissioner Ain added that currently the OPEC-led bloc look set to continue supporting prices with ongoing production cuts, instead of fighting for market share, which would practically give more incentives to US shale producers to counter OPEC-led production cuts by setting higher production records, which would ultimately compel the alliance to reconsider their position on supply cuts, as most of their own members also have higher reserves of supplies building up.
“Due to volatility in the oil market, it is difficult to precisely forecast the retail fuel price movements.”
“However, based on the short term projections in oil price movements as provided above, the ICCC is of the view that crude oil prices will continue to fluctuate in the remaining months of 2019 through to 2020 but gently towards a downward path.”
Commissioner Ain added that these price movements will mainly depend on the on-going geo-political tensions between U.S and oil producing economic countries, the demand and supply of oil, and the other aforementioned factors.