Plummeting Fuel Oil Prices May Drive Up Its Consumption

3 march 2016

The Analytical Center has published another energy bulletin. This one is titled Metamorphoses in the Petroleum Products Market. The experts note that as the Russian economy growth rate is slowing down, serious changes have taken place in the fuel market. For example, since the fall of 2015 the prices for fuel oil have taken a dramatic tumble. It is a good example of how a market reacts to excess supply even as inflation in the Russia economy is breaking all records.

Falling oil prices are actually very good news for oil refineries. However, rising taxes and escalating competition in the industry are making 2016 a less fruitful year for them. The situation with competition in Russia is bound to start levelling out soon as vertically integrated companies will not be able to prop up their in-house oil refineries with revenue from sales of crude oil.

The Bulletin also looks at the power problems faced by Russian exclaves such as Kaliningrad oblast and Crimea. The difference is that Crimea is suffering in the short term because of blockades but in just two years it is supposed to start getting reliable supplies. By contrast, Kaliningrad oblast does not have any external problems at the moment but several years from now it may end up being cut off from the Russian grid. The experts conclude that the measures that were taken in advance to ensure reliable power supply for the two energy exclaves are already producing results. In both cases, the level of energy security is regarded as acceptable.

In January 2016, production and export of oil were up on January 2015 by 2.1% and 1.1% respectively. In January through February 2016 the spot prices for natural gas and the prices for Russian contracted NG in Europe kept falling under the pressure of warm weather. As nuclear power plants gradually came back in Japan, the amounts of imports of liquefied natural gas by Japan hit a minimum since 2009 in January just as its price did. It was only in the USA that the second half of January saw prices for natural gas go up as a result of a spell of cold weather.

The Bulletin analyzes the situation with fuel oil. In late 2015-early 2016 domestic prices for fuel oil in Russia more than halved, hitting a historic low. Such a significant decline in price spurred new interest in fuel oil among a broad range of consumers. If fuel oil prices remain low, its consumption by power plants and thermal plans may increase, which may have certain environmental consequences and bring about a change in the structure of these markets. The experts review the causes of the decline in fuel oil prices and possible consequences of that for the Russian energy market.

The Bulletin also looks at the latest news in the Russian and global energy sector.

For other Bulletins see Publications.