Cautious drop in petrol prices due to oil market’s high volatility: Beltone

Doaa Elboraie
4 Min Read
Second phase fuel smart-card distribution to save EGP40bn (AFP Photo)

The Ministry of Petroleum announced, on 10 April, an “average 4.5% decrease in domestic gasoline and mazut prices” for industries. The downgrade came following a third review under the automatic fuel indexation mechanism, with the food and electricity industries remaining unaffected.

Beltone Financial believes the cautious drop is due to the oil market’s high volatility, where prices are subject to an upward revision given the recent OPEC+ deal on supply cuts. This marks the second downward revision to prices since the indexation was implemented, registering an aggregate EGP 0.50/litre drop for different petrol products and EGP 600/tonne for mazut.

The decision reflects the decline in international oil prices to an average of $51.3/bbl in the first quarter (1Q) of 2020. Coupled with the appreciation of the Egyptian Pound to an average of EGP15.77 to the dollar, the decision also falls in line with Beltone expectations of an average drop of 5-10%.

Beltone analysts added that energy prices are subject to a quarterly review under the mechanism. It takes into account the international Brent crude oil price, changes in local currency, and other transportation costs that are annually set each September.

Beltone analysts do not expect much of an impact on headline inflation from the decline given that the price of diesel, mainly used in commodity transportation, remains unchanged. They add that the transportation segment that will likely be affected by the “4.5%” drop in petrol prices accounts for 6.1% of the headline CPI basket. They project that there will be a soft decline in this segment of 1.5-2.0% during April, with the drop also coming at a time of reduced demand, given the partial curfew.

Beltone analysts believe monthly inflation momentum will be maintained in April, rising 0.9% to a headline reading of 5.6%, vs 0.6% in March. This comes on the back of increased food demand during the curfew, the Easter vacation, and ahead of Ramadan. Analysts also noted that the record-low inflation seen in 4Q19 will provide a buffer for maintaining rates within the target zone of 9% (±3%) set by the Central Bank of Egypt (CBE) by the end of 2020. Beltone highlights its view of maintained policy rates at the next MPC meeting on 14 May.

The downward revision in prices should have a positive social impact and on the industrial sector, in their view. The move coincides with the reduction of natural gas prices for industrial players introduced last month, which, coupled with the recent policy rate cuts, should provide a breather for the industrial sector.

The move poses no pressure on the state budget, which was the main reason behind the implementation of the indexation mechanism. They reiterate their view that the pace of reduction in the oil subsidy bill is not of importance given its declining contribution to expenditure, which they expect to stand at 5.5% in FY19/20, down from an average of 20% pre-reforms.

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