Another Gasoline Crisis?

Several fuel retail chains reported a shortage of gasoline at fuel stations in Dnepropetrovsk and Zaporizhya region. The deficit appeared following the Cabinet’s agreement with the major domestic fuel traders last Saturday, to set a price ceiling for A95 gasoline at UAH 4.7/L ($0.93) and for diesel fuel at UAH4.1/L ($0.81). According to the Cabinet, it signed a memorandum with the owners of 60% of the filling stations throughout Ukraine. The shortage of gasoline may signal another gasoline crisis, similar to those Ukraine faced under Yanukovich in 2004, and Tymoshenko in 2005. A deficit is a textbook effect of price capping. Although this price cap is not legally enforceable, it puts non-integrated companies in a bind, as fuel wholesale purchase prices continue to grow and thus retail margins decrease. Next Monday the Cabinet is scheduled to hold a meeting with oil refiners, presumably to cap refinery prices too. For Yanukovich and Co. to be successful they will need to offer producers some form of compensation, for example – the introduction of import duties for fuel the government first began talking about few months ago. However, this would be very undesirable for independent retailers. We expect the Cabinet cap prices through at least August-September, non-integrated retailers will be affected the most. Although the oil companies we cover, Ukrnafta (UNAF: HOLD) and Galnaftogaz (GLNG: BUY), did not sign the memorandum, they may incur administrative pressure and eventually sign. Currently, the price of A95 gasoline at their stations is about UAH 4.60-4.65/L ($0.91-$0.92), leaving them some leeway to decide.