Why are domestic fuel prices on northward trend?
12/4/2021
Since the beginning of the year, on the 5th of every new month, fuel consumers have become accustomed to pump price hikes by the Zimbabwe energy regulator (ZERA). In the current month, the price hikes saw a litre of diesel going up 1.2% in local currency, from ZW$110.41 to ZW$111.77. The US dollar pump price was left unchanged at US$1.32. Comparatively, in the previous month (March), the commodity was hiked by 5%. As for petrol, ZERA announced that a litre is going at ZW$112.96, a 3.5% increase from ZW$109.17 in March. Forex price of petrol also went up 3.1% to US$1.34 a litre from US$1.30 in the prior month. Overall, petrol is up 16% from Dec level of ZW$97.11 and diesel is up by a staggering 36% in a space of 4 months between December and April. On the international market, crude oil is up 23% from US$51.80 a barrel as at the end of December to US$63.54 as at March 31.
According to ZERA, the recent price hike was necessitated by the rising prices on the global market as well as exchange rate movement. Between March 5 and April 5, the local currency lost 0.61% of its value against the greenback on the interbank market. The price of fuel in local currency is tied to the movement of the interbank exchange rate. So, a loss in value of ZW$ forces an adjustment of prices. A strong dollar makes US denominated commodities expensive for holders of other currencies. This also contributed to the adjustment of domestic prices in line with forex exchange developments. As for global prices, they are 2 things pushing them up: covid-19 vaccines and tightened supply. The situation between December, when the vaccines were approved for emergency use, and March in terms of travel has gained momentum.
Economies have nearly opened up fully, people traveling for various reasons like to meet their families and tourism. All this is pushing oil demand up again from last year lows when global travel and economic activity were nearly grounded. Also, oil is being helped by an organized Organization of the Petroleum Exporting Countries, Russia and other allied producers (OPEC+). OPEC+ engaged in organized oil supply cuts to support prices since last year including 1 million barrels per day (bpd) voluntary cuts by Saudi Arabia. Thanks to these supply cuts and vaccine-induced global re-opening, oil prices are now up 94% from an average price per barrel of US$33.73 in March 2020 to an average of US$65.57 per barrel in March 2021. Actually, the current crude oil prices which are hovering above US$60 are now in the pre-pandemic range.
In the week under review, OPEC+ agreed to ease production curbs by 350,000 bpd in May, another 350,000 bpd in June and a further 400,000 bpd or so in July. However, the cartel trimmed oil demand growth forecast for 2021 by 300,000 bpd because of renewed lockdowns especially in Europe where covid-19 infections are on the rise again thanks to a faltered vaccine acquisition plan and poor distribution. France has entered into its third 3-week complete lockdown with school closures. Despite all this, vaccine distribution has peaked in the world’s largest economy, the U.S, and the country is on course to fully re-open by July. In the world’s top oil consumer, China, economic activity is nearing pre-pandemic levels. These 2 countries combined accounts for about 46% of global oil demand. At Equity Axis, we believe that this will support prices and our projections puts crude oil at US$70 per barrel by end of Q2.
For decades, Zimbabweans are being charged fuel prices which are beyond the regional average. Currently, our diesel and petrol prices are the highest in Southern Africa. Unlike in most other countries, the Zimbabwean fuel sector is not fully liberalized. On top of the rising prices, importers pay about US$0.05 in levies, US$0.30 in excise duty and there are other charges like NocZim debt redemption levy as well as some taxes like carbon tax which is about 5% of the cost, insurance and freight value (as defined in the Customs and Excise Act). Also, there is mandatory blending using ethanol and ethanol is costly in Zimbabwe thanks to huge state granted monopoly in its production. So, because of these mentioned charges coupled with unstable currency, oil prices in Zimbabwe will continue to remain higher than the entire region. In my view, to get a market clearing price, the sector to be fully liberalized to eliminate pricing distortions. Liberalization allows domestic prices to move in tandem with global developments since the country is a net importer of the commodity.