Global oil prices drop: Will retailers react correspondingly?
Three weeks ago, as we ushered in a new year and the TRAIN (Tax Reform for Acceleration and Inclusion) law took effect, we were a bit shocked by the sudden increases in oil prices. Most of us believed these retailers were taking advantage of the new and increases (of the existing excise tax) in excise taxes.
Well, logically, yes. Why? Because its impact is yet to be felt in about two weeks as retailers’ tanks are still filled with inventories of last year’s purchases and were therefore spared of the recent tax impositions. As complaints mount, retailers insisted that the increase in prices was merely due to the global price hikes.
Now, let us put things in proper perspective. A deeper look on the current global oil price situation reveals these information. On December 21, 2017, Brent crude closed at US$64.90 per barrel. At the end of the year, it went up to US$66.87 per barrel. While it went up to US$68.07 (the highest since 2015) per barrel on January 4, 2018, it went down a bit to US$67.62 on January 5, 2018. If this increase at the start of the year was due to the closing price of the year then there must be something fishy. Remember, most likely, what these retailers had in their tanks at the start of the year were still importations prior to December 21, 2017.
Now, granting, for the sake of argument, that they were really affected by the price surge late last year, then, the latest development can be a good test. Notably, after surging beyond US$70 per barrel (Brent), it went down to US$68.54 last week. Same is true with West Texas Intermediate (WTI).
The current situation is well anticipated by respected analysts. Two weeks ago, The Financial Times reported that the “Brent crude might go beyond US$70.00 per barrel in the near future” and it did happen in a week’s time because of some compelling circumstances.
First, Iran’s domestic issues like the growing discontent among its citizens that resulted to some deaths of rioters. Remember, Iran, the third largest oil producer in OPEC, produces 3.8 million barrels a day. Therefore, if the political upheaval in Iran worsens, then, supply will be disrupted. Moreover, its disagreement with Saudi Arabia over Yemen will possibly escalate too.
Secondly, last year, OPEC (the world’s biggest cartel) and Russia agreed to cut supply by 1.8 million barrels per day. Somehow, it had influenced global prices as well. Worse, just last November, they agreed to extend such deal until this year 2018. At the very least, until June, 2018 when they shall meet again.
While these developments look scary, we can sleep well with the thought that, apart from Russia, there are other non-OPEC members that were not part of the deal and can influence supply as well. For one, the USA, the world’s biggest oil consumer increased its production this year. As of January 12, “US crude oil production was 9.75 million barrels per day, up from 9.49 million at the start of the year”, according to data from the Energy Information Administration (EIA).” “US production is expected to break the 10 million barrels per day soon”, it added. Thus, prices dropped.
Moreover, analysts also pointed to an “expected demand slowdown at the end of winter in the northern hemisphere and excessive long positions in financial oil markets as a likely brake on any upward momentum in prices.” As an oil importing country, this is a happy development.
With this latest development, global oil prices will most likely go down further and will stabilize at a more reasonable level. The question is, will the country’s oil retailers slash their prices timely and correspondingly too? Well, that remains to be seen.
Historically, driven by greed, there were circumstances wherein certain sectors refused to be fair and cashed in or took advantage in all situations. Oil retailers are among them. As we all know, every time global oil prices go up, automatically, oil retailers raise their prices not later than tomorrow. As if they just purchased their inventories today. Knowing fully well that our supplies are all imported, it shall take, at least, two weeks to arrive. Therefore, raising it right away has no basis at all. When prices go down, these same retailers do not reduce prices automatically. Well, logically, because what they have in their tanks were purchased when prices were still high. Simply put, they come straight when prices go down but are cheats when prices go up.
That’s a no-brainer.
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