Karachi, March 03, 2022 (PPI-OT): POL products: Pricing policies to drive demand; and supply

As per provisional data from OCAC, OMC sales dropped 15% MoM in Feb-2022 to 1.5mnMT due to shorter month and all-time high retail fuel prices. The decline in HSD offtake is owing to slower demand from Agriculture and Power sector.

FO sales have been rejuvenated by uncommonly high demand for Power generation which continues to prevail owing to gas and RLNG shortages. We would also like to highlight that Power generation was also in play for diesel-based capacities.

OMC’s are likely to be negatively impacted by the PKR10/litre reduction in retail prices announced by the PM, at a time when int’l oil makes decade highs. Retail prices currently incorporate an ex-refinery price, which is lower than cost.

While the differential can be recouped via Price Differential Claims (PDC) from the govt; it has working capital implications in the immediate term – PSO receivables will increase by ~Rs805mn/ month at current rate of PDC. This could lead to concerns over low procurement, translating into lower sales despite the price reduction.

Sales drop 15% MoM

As per the provisional data from OCAC, overall OMC sales dropped 15% MoM in Feb-2022 to 1.5mnMT primarily owing to lower number of days in the month as well as retail fuel prices for MS and HSD reaching all-time highs. The decline in HSD offtake is larger owing to slower demand from Agriculture and Power sector. The POL product sales for 8MFY22 now stand at 14.45mnMT for Pakistan, higher by 14% YoY, led by all-around recovery in demand from every product.

Demand for FO and HSD dwindles; MS can recover ahead

FO sales have been rejuvenated by uncommonly high demand for Power generation which continues to prevail owing to gas and RLNG shortages. We would also like to highlight that Power generation was also in play for diesel-based capacities. However, owing to all-time high price levels of HSD as well as refineries woes on excess FO inventory levels lying underutilized, both FO and HSD sales are up 14% and 18% respectively during 8MFY22.

MS sales also declined 12% MoM as demand remained impacted from all-time high retail price of Rs160/litre. We expect this demand to recover ahead as the government has reduced prices by Rs10/litre in the recent relief measure announced for the masses.

Market share trends in Feb-2022

PSO sales declined slower than the sector, bringing its market share up to 48% in the month. A similar trend was seen with APL which also gained market share to reach to 10%. Both these companies made up for the loss of share by SHEL and HASCOL.

During 8MFY22, the loss of sales by HASCOL has been mostly taken over by PSO whose market share for both MS and HSD rose to 44% and 50%, respectively. We believe, the loss in HASCOL sales and other companies will continue to bode well for sales of PSO, APL and SHEL.

Shortage concerns may likely haunt amid PDC

As per news flow, OCAC is concerned about the emerging diesel crisis as the current inventory levels may not be able to last till the harvesting season. It is being suggested that refineries should plan crude procurement for Mar-Jun’22, however, Russia-Ukraine tensions may likely cause delay in these activities considering commodity price run.

In addition to this, OMC’s are likely to be negatively impacted by the Rs10/litre reduction in retail prices announced by the PM, at time when int’l oil makes decade highs. Retail prices currently incorporate an ex-refinery price, which is lower than cost. While the differential can be recouped via Price Differential Claims (PDC) from the govt; it has working capital implications in the immediate term. This points toward concerns of low procurement, translating into lower sales despite the price reduction.

Prior to 2007, PSO and other OMCs were able to claim PDC; however, since then, most companies have been unable to receive these claims. At the current level of Rs2.28/litre PDC on HSD, receivables of PSO would increase by Rs805mn/month.