Pakistan OMCs – Inventory losses looming amid disparity between oil prices


The news of petroleum shortage has been making rounds, with nearly all pumps, barring PSO’s, reportedly out of fuel inventory. The disparity between domestic petroleum prices set for Jun20 and the imported cost of oil is the prime reason for the shortage. Domestic prices set for Jun20 are estimated to be PKR 17/liter cheaper than the actual cost of importing the commodity. Consequently, the difference implies all sales during the month will record significant inventory losses; thereby, compelling nearly all OMCs and Refineries to either postpone import orders or scale back production to avoid said losses.

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Losses estimated at PKR 17-18bn for the energy chain :Based on an average Arab Light price of USD 32/bbl during May20, average importing costs are estimated at PKR 42/liter for MS and PKR 50/liter for HSD, implying any sales during Jun20 will be subject to significant inventory losses due to the prevalent parity. Note that domestic fuel is presently being sold at an exrefinery price of PKR 23.99/liter for MS and PKR 31.11/liter for HSD. As PSO is the only OMC actively replenishing its supply chain, it exposes itself to large quantum of inventory losses. While low ex-refinery prices were a direct result of PSO’s subdued importing costs, it is important to note that PSO ordered 5 of its cargoes amounting to 300kt for Jun20. The table below highlights potential losses for PSO.

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Other OMCs and Refineries avoid loss by curbing sales
Other OMCs and refineries have avoided potential losses by curbing their sales to
avoid selling at significant losses. Potential losses bypassed by the OMC sector are
depicted in the table below.

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Concluding remarks
The shortage is largely a result of the prevalent lagged pricing formula, resulting in
a disparity between domestic prices and global import costs. Onwards, we believe
the central government will likely be compelled to update Jun20’s pricing in hopes
of revitalizing the energy chain. Nevertheless, the situation will likely resolve itself
by Jul20 once domestic prices reflect the prevalent crude prices.

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