Overview of the macro environment

A rollercoaster year for the world economy

As far as the global economy is concerned, 2009 was a rollercoaster year. At the beginning of it, the risk of an imminent financial and economic collapse seemed very real. Economic activity, trade and investment were declining steeply. Asset prices were volatile and still on a downward trend. Policymakers globally reacted by an extreme loosening of fiscal and monetary policies and in many countries by de facto guaranteeing the financial system. The result was a turnaround in economic activity after the first quarter, and a spectacular recovery in asset prices. Emerging markets in general led the economic recovery, while (mostly rich) countries burdened with high debt were lagging. Despite the economic upturn, unemployment continued to increase throughout the year in OECD countries, and there is a broad consensus among analysts that the recovery remains fragile as many of the factors behind it are temporary. The extreme monetary loosening has increased inflation risks and may have contributed to incipient new asset price bubbles in some areas. The unprecedented fiscal deficits raised concerns regarding the long-term sovereign solvency of some economies.

The return of high oil prices

Driven by the improving economic climate and receding fears of a double-dip recession, oil prices nearly doubled throughout 2009 surging from around USD 40/bbl in January to just below USD 80/bbl by the year-end. The price climb was more or less gradual with only two notable corrections in July and November as a combined result of several upward and some strong downward pressures on oil prices. The remarkable discipline of OPEC which maintained a compliance level of over 80% with its agreed production cuts during most of H1 2009 supported the stabilization of oil prices in the USD 40-50/bbl range. The gradual increase which started around March was fuelled by the slowly improving economic outlook as stimulus programs worldwide began to take effect. Moreover, uninterrupted oil demand growth in emerging Asia could partly offset the vast demand loss in the OECD, indicating that a tight oil market can soon return. In addition, financial investors – mainly driven by inflation fears and the steady weakening of the dollar from late-March – also returned to dollar-denominated commodities and invested heavily in oil derivatives, which may also have increased the upward pressure on oil prices. On the other hand, some key fundamentals remained persistently weak throughout 2009, which limited the rate of price increases. The collapse of demand in developed economies drove inventories to record-high levels, and the sluggish demand recovery in the OECD kept commercial stocks (esp. middle distillates) well above the 5-year average for the rest of the year. As a result of deep production cuts, OPEC’s effective spare capacity exceeded 5 mb/d in most of 2009, a level not seen since 2002 and regarded by analysts as comfortable to shield against potential supply disruptions. Moreover, OPEC’s strict compliance started to deteriorate along with the oil price recovery and dropped from over 90% in March to just 63% by December, acting as a drag on oil prices.

Weak margins reflecting the recessionary environment

Refining margins remained below the 5-year average in 2009. The slow rate of economic recovery kept diesel and jet fuel demand at very low levels (and resulted in persistently high inventory levels), while demand for the less cyclical gasoline and naphtha was more resilient at a time of lower refinery utilization rates. As a result, diesel and jet fuel crack spreads remained weak in 2009, while gasoline and naphtha crack spreads approached the 5-year average level. Historically negative fuel oil crack spreads remained much stronger than pre-crisis levels reflecting the recessionary environment characterized by low refinery utilization.
The Brent-Urals spread was historically low and averaged below the USD 1/bbl mark in 2009. The dramatic narrowing of the Brent-Urals spread since Q3 2008 was the result of the strengthening fuel oil crack spread (due to lower refinery utilization) and of OPEC’s production cuts targeting heavy grades similar to Urals. Since Urals result in a higher fuel oil yield, the lower discount on fuel oil led to the decline in the discount of Urals relative to the lighter Brent, while OPEC cuts tightened the supply of comparable heavy grades, further narrowing the Brent-Urals spread.

CEE economies hit hard, but recovery underway

Most CEE countries, particularly small export oriented economies were hit hard by the global recession and suffered a sharp drop of GDP during 2009. Real sectors, especially industrial production, construction and domestic demand recorded significant losses throughout the CEE.  After hitting the bottom in Q2 2009, most CEE economies started to show signs of recovery thanks to the slow return of growth in the region’s main Western export markets. Investor’s confidence have since stabilized and the conditions of refinancing public debt eased sufficiently as credit default swap (CDS) spreads returned to comfortable levels. At the same time, domestic demand continue to remain weak and massive stimulus spending of governments increased budget deficits dramatically, although it still remains well below the EU15 average in CEE economies.

CEE fuel demand

The motor fuel demand drop remained moderate in the CEE region with gasoline decreasing by a mere 0.3% and diesel by 1.2%. This was mainly due to the Polish economy’s resilience to the global recession, which resulted in a healthy growth in both diesel and gasoline consumption. Poland and the Czech Republic also enjoyed the benefits of large-scale fuel tourism of German motorists.

Hungary: Export-driven rebound expected

The Hungarian economy experienced a significant 6.3% GDP drop in 2009. The large drop in private consumption played a considerable role in the downturn. Fiscal austerity measures reined in government spending and helped to bring the 2009 budget deficit figure to 4% of GDP. The economic contraction likely bottomed out in Q4 only, later than in most CEE economies indicating that the massive debt reduction had a negative effect on growth. Weak household demand and high unemployment rate further constrains Hungary’s growth prospects, and thus the economic recovery will be fuelled by external rather than domestic demand. Annual GDP growth will likely remain slightly negative in 2010, and return to firm growth in 2011 only.

Hungary: Absorbing part of the Slovakian demand

Hungarian motor fuel demand recorded only a marginal y-o-y decline in 2009, which is much better than could have been expected based on GDP data. Gasoline demand even improved by 0.2% while demand for diesel decreased by 0.6% in 2009. Fuel demand in the first half of 2009 was boosted by the weakening of the HUF against the EUR, which attracted fuel tourism from Slovakia and Austria, as well as increased purchases of international freight transporters. The VAT and excise tax increases on July 1 eroded some of this windfall demand by the second half. However, the well-performing agricultural sector, which remained largely unaffected by the crisis, continued to support domestic diesel demand throughout the Fall.

Slovakia: Sharp contraction, but relief in late-2009

Slovakia’s small open economy could not escape the negative effects of the global recession in 2009 as export orders from key Western European markets declined dramatically. Slovakia’s real GDP contracted by around 5% in 2009, a sharp drop considering the previous year’s 6.2% growth rate. The fall in export orders forced many companies to cut jobs driving unemployment rate to over 13%. At the same time, stimulus spending pushed budget deficit to exceed 6% of GDP. The last months of 2009, however, brought some relief for the economy as industrial production and export activity recorded gains for the first time since Q4 2008 due to the return of growth in Western Europe. Eurozone membership helped Slovakia throughout the recession to avoid turmoil in its financial markets and to keep borrowing costs at acceptable levels for both companies and the government.

Slovakia: Motor fuel demand hit by the Eurozone entry

Motor fuel demand was hit hard in Slovakia during 2009 with gasoline consumption falling by 9% and diesel consumption by 11.9% y-o-y. This significant decrease was only partly resulted by the recession, the other important contributing factor was the weakening of national currencies in neighboring countries against the Euro, which propelled fuel tourism from Slovakia and shifted fuel purchases of international freight transport to neighboring countries, particularly to Hungary.

Croatia: Moderating contraction in Q4 2009

The global economic crisis affected the Croatian economy badly, mainly via the loss of export demand. For the first three quarters of 2009, GDP was down by more than 6% y-o-y, but economic contraction moderated in the last quarter. Economic growth is expected to return in 2010 fuelled mainly by the return of external demand. The EBRD expects Croatia’s GDP to expand by 0.6% in 2010 and by 2% in 2011.

Croatia: Only slight fuel demand decrease due to the strong holiday season

Motor fuel demand drop was modest in Croatia, where the stronger-than-expected holiday season resulted a 1.4% increase in gasoline consumption while the more cyclical diesel demand dropped by 4.7%. Croatian retailers also benefited from fuel tourism from neighboring Eurozone countries (Austria, Slovenia) due to their lower prices.