The Jakarta Post
Global crude oil prices have crashed to record lows this year as a result of a collapse in the demand for oil amid the COVID-19 pandemic and a price war between the world's major producers, Saudi Arabia and Russia.
US crude fell to negative value for first time in history on April 20 as the coronavirus crisis sapped demand and producers ran out of places to store all their excess barrels of crude. Oil prices slightly recovered in the following days as demand, battered by COVID-19 restrictions, started to increase.
However, despite the surge, crude prices remain low with West Texas Intermediate (WTI) crude futures at $17.75 per barrel and Brent crude at $25.38 a barrel on Thursday, Reuters reported.
Experts say the price crash hit the upstream oil industry, which is a major contributor to Indonesia’s state revenue, hardest. However, they also say the crash provides some relief to midstream players, both fuel refiners and distributors, amid slumping demand for fuel, a commodity mainly used by the transportation sector.
The price crash also helped many consumers worldwide save on fuel expenses but not so in Indonesia, which imposed a low price ceiling for fuel distributors just prior to the crash.
“We are going to be hit from many angles,” economist Enrico Tanuwidjaya of Singapore-based United Overseas Bank (UOB) told The Jakarta Post on Tuesday.
Contrary to other Southeast Asian countries, Indonesia’s fuel prices have not budged since the crash and local stakeholders have not signaled a discount any time soon, citing multiple reasons.
State-owned oil company Pertamina, which operates over 90 percent of gas stations in the country, frequently says that Indonesia’s falling demand undermines the need for cheaper fuel.
Company data obtained by the Post shows that Pertamina’s gasoline and diesel sales between March and April were, respectively, 16.8 percent and 8.4 percent lower than the previous two months. The fall was mainly caused by the implementation of social restrictions in Indonesia’s big cities since the middle of March.
Fuel consumption dropped to such an extent that Jakarta's air pollution level fell by a third and two West Java mountains became visible from the notoriously smoggy capital city.
“Prices are low but people are not buying our stuff, so we are not earning,” Pertamina president director Nicke Widyawati told legislators via video conference last week.
Several observers including a trade union, the National Federation of Trade Union (KSPN), previously urged Pertamina and the government to reduce fuel prices to help Indonesia’s poorest families weather the economic shocks caused by the emergency measures to curb the COVID-19 transmission. The government introduced earlier this year a price ceiling on fuel sales.
Energy and Mineral Resources Ministry spokesman Agung Pribadi, whose ministry issued the price ceiling, countered this argument by pointing out that the government’s fuel subsidy program for the poor remains in place.
“The government is still observing and evaluating oil price developments,” he said in a statement.
With falling global gasoline prices and declining domestic fuel demand, Pertamina has plans to import 9.3 million barrels of gasoline and to cut back its monthly crude oil-refining operations by 43 percent starting May “over the course of COVID-19”.
Pertamina, which operates Indonesia’s biggest refineries, will execute the steepest output cut for jet fuel or avtur by 66.3 percent and unsubsidized diesel by 72 percent. The former fuel is mainly used by airplanes and the latter by commercial vehicles.
“We expect 2020 refining margins to be the weakest in the last 20-25 years,” said Sushant Gupta, research director at energy consultancy Wood Mackenzie, commenting on the expected performance of Asia Pacific oil refineries this year.
Gupta advises refiners to be flexible in adjusting refinery output to those oil-based products with fastest growing demand. He added that low oil prices provided an opportunity for Asia’s heavy oil-consuming countries “to expedite filling up their petroleum reserves.”
In line with Wood Mackenzie’s analysis, Pertamina’s Nicke told legislators that the company was looking to diversify its refinery output into petrochemicals. The state-owned company also rented three oil tankers while prowling for a fourth tanker to stockpile cheap oil.
However, Nicke said that, going forward, the company would not purchase more storage space because tanker rental prices were soaring as many other countries implement similar hoarding strategies.
Falling crude oil prices have forced Indonesia to revise down its annual oil production target, setting the country a step back from its ambition of becoming a self-sufficient oil economy.
The Upstream Oil and Gas Special Regulatory Taskforce (SKK Migas), initially bent on maintaining 2020 targets, recently revised down by 4 percent to 725,000 barrels of oil per day (mbopd), amid mounting economic pressure.
“We are looking for ways out so that changes aren’t that big,” said SKK Migas head Dwi Soetjipto.
Indonesia’s top two homegrown oil producers, Pertamina and privately owned PT Medco Energi Internasional, have cut back upstream production targets by 29,000 barrels of oil equivalent per day (boepd) and up to 10,000 boepd, respectively.
Pertamina projects its upstream revenue to fall by up to 59 percent below initial expectations this year under a worst-case scenario, whereby the national benchmark Indonesian Crude Price (ICP) averages $31 per barrel this year.
Two economists told the Post that the crash will likely have a negative impact on Indonesia’s state revenues but positive impact on the country's current account deficit (CAD) as the decline in the US dollar spending for oil imports will reduce the deficit.
A sizeable portion of the country’s CAD, which puts pressure on the rupiah exchange rate, comes from oil imports.
The economists expect state revenue shortfalls from the oil and gas industry to exceed savings from fuel subsidies, which are expected to fall due to the decline in demand. The government had, prior to the pandemic, expected to earn Rp 127.3 trillion from the industry and spend Rp 18.7 trillion on fuel subsidies this year.
“So a marginal benefit plus a relatively significant impact on crude revenue then, on a net basis, fiscally, its negative but for the CAD it will actually help narrow it,” said economist Enrico.
“We import crude and fuel in huge volumes – around 800,000 barrels per day – but with such low prices then the import value of that crude and fuel becomes very cheap,” said energy economist Fahmy Radhi of Gadjah Mada University (UGM) on Wednesday.
However, Fahmy said that falling crude prices also risked derailing the value of Indonesia’s other commodity exports such as metal ores and coal, whose international trade prices are tied to oil prices, among other variables.