Equity Analysis /
Pakistan

Pakistan OMCs - Nov’22: Major slump in FO volumes dragged overall demand

  • Petroleum product demand, after a brief period of recovery in October, dampened again in November.

  • Furnace Oil sales led the overall decline in volumetric sales and reduced to 136mnMT (-33% MoM).

  • HSD demand uplift was short lived and fell by 18% MoM after an increase was witnessed in Oct’22.

Intermarket Securities
2 December 2022

POL product demand, after a brief period of recovery in October, dampened again in November. FO sales led the overall decline in volumetric sales and reduced to 136mnMT (-33% MoM), contributed the overall momentum of downward trend that the country has been experiencing for the last few months. POL product sales are struggling in FY23 so far, with 5MFY23 demand declining by 20% YoY, due to the overall slowdown in economic activity, high international oil prices, expensive local POL products due to taxes and a decline in auto sales.

  • FO inventories continue to pile up at refineries indicating lackluster demand. Refineries have already issued warnings signs by showing intention to shut down unless the government takes steps to alleviate over supply by overriding the merit order in the power sector. FO volumes may recover slightly as the winter season gets more intense, and Pakistan bids for fewer RLNG Cargos amid a tighter global market.

  • MS volumes remained relatively stable (-1% MoM), but cumulatively down 16% YoY in 5MFY23. Substantial increase in oil prices coupled with petroleum levy continues to restrict demand and it may decline further, as there are chances that IMF may require the government to place GST on POL products in order to meet revenue targets. 

  • HSD demand uplift was short lived and fell by 18% MoM after an increase was witnessed in Oct’22, indicating prolonged demand curtailment. PDL on HSD has increased to PKR25 per litre in Dec’22, but there is room for the government to impose further PDL charges to meet tax revenue shortfall. Taxing POL products is inflationary (particularly HSD). Hence, the government will likely increase taxes in tandem with lower international oil prices to manage inflation.

Recent decline in global oil prices has given the government an opportunity to revise OMC margins upwards with MS margins increasing by 8.7% to PKR4.00 per litre and HSD margins increasing by 39% to PKR5.41 per litre. This is a partial revision and as per ECC decision (1st November 2022) the final OMC margin for both MS and HSD will rerate to PKR6.00 per litre. However, it is difficult to pinpoint a timeline as the government will likely prioritize taxation over margins. Increase in margins is positive for the sector as this will increase cash earnings. As per news flows, OMC deregulation has put on hold as the government has decided to deregulate the sector by 2027 post technical upgradation of refineries which is due in 2026.