As large parts of the economy are grinding to a halt, many households are looking at their finances to see how they can make their savings last longer.
Declining demand will be a defining feature of the economy for the foreseeable future. This will in time translate into lower prices.
The price of oil is one area where these dynamics are already at play. US crude oil prices fell below US$20 a barrel this week. This is down from US$61 at the beginning of 2020 and the lowest level in 18 years.
Traders are expecting demand for oil to collapse further as lockdown measures are maintained in much of the world. Meanwhile, Saudi Arabia and Russia are locked into a price war which has seen both countries increase, rather than slow, production, driving prices down further.
Consumers can see the first signs of the extreme fall in oil prices at the gas stations.
Fuel prices began to decline marginally during the past four weeks, with the most significant reduction during the week of 16 March.
Steeper decline in gas prices imminent
Utility regulator OfReg, which closely monitors local fuel prices, says the price of gasoline will come down as the existing fuel stock is depleted and replenished.
Cayman imports fuel mainly via tankers, which take about four to five weeks from the point of loading at refineries or major fuel terminals before they arrive in Cayman.
For fuels imported on ISO containers, the average time is seven to 12 days, according to OfReg officials.
The regulator’s fuel analyst has noted less local demand for road fuel, following the COVID-19 lockdown and shelter-at-home measures. Because of high inventory at certain gas stations, significant price reductions may therefore not be seen for another week or two.
Depending on the inventory accounting method, there can be additional delays, especially in the case of wholesalers, who use the FIFO inventory management system, the regulator noted.
If wholesale prices are falling, this ‘first in first out’-type of inventory costing assumes the more expensively purchased fuel is sold first. Other wholesalers may use a blended cost approach.
The utility regulator said it will “continue to examine the effect of this in terms of timing of price changes and competition effects”.
But officials noted, “Prices at the pump will continue on a declining trajectory.”
Why don’t gas prices decline as much as the oil price?
The relationship between the oil price and local fuel prices is not directly proportional.
Crude oil is just the raw material for gasoline. There are many additional costs that influence gas prices. In addition to the first cost of oil, this includes freight and insurance, trader margins, duties, wharfage and port fees, pipeline fees, wholesale margins and retail margins.
Nevertheless, the regulator expects prices per imperial gallon for regular gasoline to drop below $4 locally, unless external factors change.
OfReg said it “continues to scrutinise the flow of cost across the supply chain to ensure the benefit of the slump in oil prices accrue to consumers, particularly in this crisis”.
Why are different fuels reacting differently to oil price changes?
For a long time, gas prices have been relatively stable in Cayman. Last year, premium fuel cost on average CI$4.84, regular CI$4.43 and diesel CI$4.51, weekly data released by OfReg shows.
However, a Compass analysis indicates that compared to 2018 when crude oil was on average 12% more expensive than last year, local fuel prices were not much lower. While prices for regular had dropped by 3.25%, the cost of premium was down just 0.4% and diesel was in fact more expensive by 1.1% year on year.
The regulator explained that premium is in less demand than regular gasoline in Cayman. Premium is also subject to higher refinery margins. And logistics factors, such as the frequency of importation, result in less variable and higher prices for premium than regular fuel.
The price of regular gasoline therefore follows oil market trends much more closely than premium fuels. Diesel prices, on the other hand, are driven by a different segment of the market as the bulk of diesel is imported for power generation.
Yet the regulator acknowledged that this previous reduction in the price of oil was not fully reflected in local gas prices.
“Based on our analysis of oil prices versus the various refined products, in the US especially, it was evident that refiners were taking relatively larger refinery margins during the lower oil price periods. Hence the full reduction in oil prices were not being passed on,” OfReg said.
Because so many factors are influencing gas prices, the regulator is reviewing last year’s fluctuations.
OfReg said, “More importantly, however, the current Market Assessment for which the phase 1 consultation has commenced last week, will comprehensively address regulatory and competition issues in the market to ensure prices are equitable.”