Gas price hike likely to continue unless market conditions changeWednesday, July 21, 2021
BY ANDREW LAIDLEY
The global oil market is gearing up for an increase in oil supply after the Organization of the Petroleum Exporting Countries (OPEC) and its allies reached an agreement to boost oil production by 400,000 barrels per day starting August. The agreement was made in a bid to reduce escalating oil prices.
US crude futures fell more than seven per cent Monday, representing the largest drop since May this year, as the market responded to the announcement. Still, the price for one barrel of US crude oil on Tuesday was as much as US$67.45 which is the highest value since the start of the novel coronavirus pandemic.
According to general manager of Petrojam, Winston Watson, the good news on the global market may not translate to good news for Jamaica's gasolene market right away.
“We're talking about two different economies and they're driven by two different conditions. The crude oil market is driven by what OPEC is saying, finished product market is driven by other factors such as what is happening in the market space, people are driving more, people are going on vacation so you are not going to see an immediate reduction. But hopefully, in the long run, if supply continues as they are being promised in August by OPEC, then hopefully the crude oil prices will come down and ultimately it may result in the reduction in the finished product prices, “ said Watson.
State-owned oil refinery Petrojam buys crude oil from international markets weeks in advance of putting the finished product on the local market. Therefore, there will always be a delay between global crude oil price movements and pump prices. Another crucial component in understanding the oil and gas sector is the difference between crude oil which is the raw material and finished products which is what consumers purchase at the gas pumps.
“More supply to the market means lower prices for crude oil but not for finished products,” Watson stated. By the time the product reaches the marketing companies, the price would have already gone up because of charges associated with transportation, government taxes and import fees. The marketing companies would then add a mark up to the price and re-sell to the retailers who also add their own mark up.
With all that considered, gas prices have been climbing for eight consecutive weeks. Prices on 87 and 90 gasolene went up by as much as 10 per cent during the period, reaching a historic high on July 15. Despite the signs of reprieve in the global market, there's still no clear indication when prices will begin to fall in Jamaica.
But the Petrojam general manager remains hopeful.
“Ultimately, I'm hoping it will drive down the price of the finished product since the crude oil is the raw material.”
He said, “Once the market has that confidence that people can travel then the demand for gasolene will go up and drive up the price. Last year when we had COVID, people couldn't travel so the demand was not there and the prices fell.”
According to Statista, the price development of US crude oil relative to the London traded Brent crude oil has been influenced by variances in US crude oil transportation and increased US oil production. New transportation infrastructure became operational in early 2013, easing the movement of crude oil and raising the price of US crude oil. Since then, US refineries have increased production of crude oil to record levels.
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