Why GCC demand for petrol and diesel

Consumer demand for petrol and diesel in Gulf countries has been waning since price reforms were initiated by regional governments and subsidies were dropped. Hence, many residents are switching from more expensive higher-grade petrol to economical lower-grade options, analysts said.

Demand for petroleum products was growing robustly due to strong economic growth, an increase in population and heavy subsidy prior to the liberalisation policies enforced a couple of years ago by regional governments by linking petrol prices to international markets.

"In early 2016, GCC governments introduced limited energy price reforms and increased prices. Although prices remain very low compared to international prices, there has been a decline in energy demand growth, and in some instances, a negative growth. However, the slowdown in energy demand growth cannot be attributed to price increases alone," Arab Petroleum Investments Corporation (Apicorp) analysts Mustafa Ansari and Ghassan Alakwaa said in a report.

However, they said that the slowdown in energy demand growth cannot be attributed to price increases alone because GDP growth and economic activities in the region have also slowed since mid-2014.

The UAE was the first country in the GCC to liberalise petrol and diesel prices. Although the government sets prices on a monthly basis, prices in the UAE are directly linked to international ones. Petrol and diesel prices in the UAE came down to the lowest level this year. The price of unleaded petrol 98 has been reduced to Dh1.86 per litre, down from Dh1.96 in the previous month. Petrol 95 will cost Dh1.75, down from Dh1.85 in June, while unleaded petrol 91 will cost Dh1.68, down from Dh1.78. Diesel, meanwhile, will cost Dh1.84, down from Dh1.90.

In Saudi Arabia, the government increased the price of higher-grade unleaded petrol to SR0.90 per litre from SR0.60; lower-grade petrol rose to SR0.75 a litre from SR0.45 a litre. Households in Saudi Arabia are likely to feel the main impact of the increase in petrol prices given their reliance on personal transport and the limited public transport alternatives. The price of diesel, mainly consumed by the power sector and industry, was raised to $14 a barrel, while diesel for commercial transport was raised to $19 a barrel. Other GCC countries have followed suit and introduced limited pricing reforms.

Diesel demand in Saudi Arabia was hit hardest. After having peaked at 779,000 bpd in 2015, diesel demand declined to 701,000 bpd in 2016, representing a decline of 10 per cent in one year. In the first quarter of 2017, demand stood at around 586,000 bpd, although this number will likely increase as demand rises during the summer months.

The fall in diesel demand was seen in both the power sector where SEC is increasingly relying on gas and in transportation where higher prices and a slowdown in economic activities in the Kingdom is weighing on demand. Petrol demand, on the other hand, has fared better. Demand increased from 529,000 bpd in 2014 to 568,000 bpd in 2015, where it also remained in 2016. In the first quarter of 2017, a further rise to 590,000 bpd was observed. Sources suggest that there has been a shift in demand patterns as most households switched from high to lower grade petrol.

Source: Khaleej Times