World crude prices graze $83 per barrel

DOF: Still no fuel tax suspension

MANILA, Philippines — As the price of Brent crude touched its highest level since November 2014, sending jitters across the globe, Philippine officials made it clear there would be no automatic suspension of the fuel excise tax imposed under the Tax Reform for Acceleration and Inclusion (TRAIN) law.

Benchmark Brent was up 16 cents at $82.89 a barrel early yesterday, after touching $83.32, the highest level in almost four years. US light crude was up four cents at $73.29.

The increase came amid supply concerns before US sanctions against Iran come into force next month.

In a text message, Finance Assistant Secretary Antonio Lambino said the suspension mechanism under TRAIN is governed by certain conditions.

A suspension would only be carried out if Dubai oil prices, based on the Mean of Platts Singapore (MOPS), average $80 per barrel for three consecutive months before the next increase.

“The oil excise suspension mechanism in the TRAIN law was designed to come into effect for the subsequent increase if the price per barrel hits a three-month average of $80 (specifically, MOPS) before the next scheduled increase,” Lambino said.

“The law passed by Congress provides specific conditions for the suspension mechanism. The suspension mechanism is automatic based on these conditions,” he added.

The next increase in the excise tax on fuel is scheduled on Jan. 1, 2019. By then, the excise tax on diesel fuel will be P2 per liter more – or a total of P4.50.

This means the next increase would only be suspended if Dubai crude prices average at least $80 per barrel from October to December.

Lambino assured the public that measures are in place to mitigate the impact of rising oil prices on the poor.

“Government is already implementing measures to help those who need it most via discounts for public utility vehicles that the DOE (Department of Energy) negotiated with oil companies early this year and LTFRB (Land Transportation Franchising and Regulatory Board)’s Pantawid Pasada Program,” he said.

Under the Pantawid Pasada, the government will distribute fuel vouchers this year amounting to P853 every month among 179,852 public utility jeepneys with franchises.

The government has allocated P977 million for the first tranche of the program this year.

The fuel subsidy would be distributed by the Land Bank of the Philippines via debit cards.

Lambino made the clarification yesterday as senators reminded the administration of the automatic excise tax suspension provided for in the TRAIN Law.

Tripwire, ripple effect

Senate President Ralph Recto said the movements of Brent crude prices would likely have a ripple effect on other price boards, including the MOP.

He said the “tax freeze” is explicitly provided for in the law and is reiterated in Bureau of Internal Revenue Regulations No. 2-2018, containing the law’s Implementing Rules and Regulations (IRR).

“The tripwire is $80 per barrel, based on Dubai crude as reflected in MOPS,” Recto said.

“The language of the law is clear. So it (suspension) must be self-executory and automatically implemented,” he said.

“The brakes on excise taxes on petroleum products must be as fast as how the government collects from TRAIN,” he added.

Section 5 of RR 2-2018 states that “for the period covering 2018 to 2020, the scheduled increase in the excise tax on fuel as imposed in this section shall be suspended when the average Dubai crude oil based on Mean of Platts Singapore for three months prior to the scheduled increase of the month reaches or exceeds eighty dollars per barrel.”

He warned that rising crude prices and a weak peso are a bad combination for transportation and cooking fuel prices.

Recto cited predictions that oil prices will hit $100 per barrel by the end of the year as the Organization of Petroleum Exporting Countries (OPEC) “seems not interested in increasing output.”

Sen. Sonny Angara, chairman of the ways and means committee, said he would have to check with DOF on its basis for considering that oil price has hit $80 per barrel. Angara said the DOF was not transparent in its formula.

Sen. Sherwin Gatchalian, chairman of the economic affairs committee, said he has been closely following movementsof Brent crude and has come to the conclusion that oil cost “is really volatile globally.”

Lack of spare reserves

In London, analysts said major oil producers are hinting at lack of spare reserves or the initiative to raise production.

“Saudi Arabia is signaling that they do not have a lot of prompt spare capacity available, or that they don’t have the will to really use it on a proactive basis,” Petromatrix strategist Olivier Jakob said.

“There’s nothing right now that gives a strong incentive to be a strong seller of the market,” he said.

Investors have indicated they see prices rising, loading up on options that give the holder the right to buy Brent crude at $90 a barrel by the end of October. Open interest in call options at $90 a barrel has risen by nearly 12,000 lots in the last week to 38,000 lots, or 38 million barrels.

Higher oil prices and dollar strength, which has battered the currencies of several big crude importers, could hit demand growth next year, analysts said.

But for now, the focus is on US sanctions on Iran’s energy industry that will apply from Nov. 4 and are designed to cut crude exports from the third biggest producer in the OPEC.

Several major buyers in India and China have signaled they will cut purchases of Iranian oil. China’s Sinopec said it had halved loadings of Iranian oil in September.

“If Chinese refiners do comply with US sanctions more fully than expected, then the market balance is likely to tighten even more aggressively,” Edward Bell, commodity analyst at Emirates NBD bank, wrote in a note.

Hedge funds have increased bets of a further price rise. Exchange data show the combined net long position in Brent and US light crude futures and options at its largest since late July, equivalent to about 850 million barrels of oil.

US President Donald Trump spoke to Saudi King Salman on Saturday on ways to maintain sufficient supply.

“Even if they (Saudi Arabia) wanted to bend to President Trump’s wishes, how much spare capacity does the kingdom have?” said Stephen Innes, head of trading for Asia-Pacific at futures brokerage Oanda in Singapore.

With about 1.5 million barrels per day of Iranian oil expected to go offline on Nov. 4, prices  could “rocket higher with the flashy $100 per barrel price tag indeed a reasonable sounding target” if investors doubted the Saudi ability to respond with enough extra output, he said.– With Reuters