No lockdown, no problem: oil volumes increase in May

One of the stranger side effects of the national lockdown imposed on Pakistan between April 1 and May 9, was witnessing perfectly empty roads in otherwise congested urban cities. No Careem, no Uber, no buses, no intra-provincial travel, no domestic flights. Who needed fuel now?

[private] With the complete lifting of restrictions later in May, oil marketing companies can rest easy: demand and sales for fuel shot right back up. Volumetric offtake increased significantly by 39% month-on-month to 1.5 million tonnes, according to Shahrukh Saleem, research analyst at AKD Securities, an investment bank, in a note issued to clients on June 3.  However, volumes still declined 12% year-on-year, though this figure was expected, due to the impact of Covid-19. 

However, different fuels had vastly differing rates of growth, with furnace oil and motor spirit emerging out of the slump of April, high speed diesel a little less so, while jet fuel was left somewhat crushed. 

Furnace oil, which is used primarily in Pakistan for electricity generation, saw its sales increase significantly by 109% in May when compared to April. There are several reasons for this: the easing of restrictions, but also the low base month of April, when not much is needed by way of surplus electricity generation, which is what furnace-oil-fired power generation units are typically used for. Some of that increase was expected, as every year in the summer there is an increase in demand for electricity (lockdown or no lockdown, something needs to run to our fans and air-conditioners).

However, on a yearly basis, furnace oil sales declined by 51%. “We believe…[it has become] a casualty of cheaper power sources being utilized,” according to Saleem. 

For the last few months or so, pre-Covid, furnace oil has actually been in mild competition with natural gas, the other major fuel for power plants in Pakistan. With furnace oil prices steadily declining, it could make the difference between the cost of electricity generation from furnace oil and natural gas much smaller. If one follows Saleem’s view, natural gas just managed to edge out furnace oil, despite the decline in price. 

Motor spirit, or petrol, stands out for being the only fuel that has sales which not only rose on a monthly basis (by 46%), but also increased on a yearly basis (by 5% only, but still). 

“Apart from resumption of economic activity, we believe an increase in demand due to low prices must have played a part as well,” noted Saleem, referring to the spate of very low oil price brought about by the international oil crash. 

High speed diesel also saw its sales increase, (though not as significantly as the previous mentioned two fuels), rising 26% month-on-month. Much of this demand was fueled by the transport sector, and also from the agriculture sector due to wheat harvesting in April/May, according to Fawad Basir, analyst at Topline Securities, in a note issued to clients on June 2. However, sales for high speed diesel on a yearly basis fell by 3%. 

One fuel that did not emerge intact? Jet fuel. The airline industry globally is basically non-existent at this point, and Pakistan’s domestic flight operations are no exception. With most flights suspended across the country. Jet fuel sales feel 22% on a monthly basis, and by a whopping 91% year-on-year. 

So, what does this all mean for the players in the market? Market shares for Pakistan State Oil, Attock Petroleum, Hascol Petroleum, and Shell in May stood at 42%, 9%, 8% and 7% respectively. In comparison to May 2019, PSO said its share fall by nine percentage points, while Hascol saw its share increase by 1 percentage point. 

May was not an especially kind month for Pakistan State Oil, despite the 58% increase in sales on a monthly basis. The company had a bit of a bungle with supply overhangs in the supply chain of independent power producers and refineries. Subsequently, there was a 93% decline in furnace oil year-on-year, which largely contributed to PSO’s own volumes declining by 27% year-on-year (compare that to the industry average of 12%). 

However, within retail fuels the company still retained an edge, with an increase of 61% year-on-year. This led to its market share increasing to 45.2% in May against 37.8% in April. 

Hascol also did well in retail fuels, with an increase of 25% year-on-year, which took its market share to 8.6% in May, compared to 7.8% in April. Its volumes also rose by 36% MoM. 

PSO still might have a fighting chance, however. The Pakistan Energy Sukuk-II, which is worth Rs200 billion, was recently listed by the Pakistan Stock Exchange. The sukuk was designed to help reduce power sector circular debt. Should disbursements of payments be on the card (and the news indicates that it is being finalized), then PSO will stand to be a major beneficiary, according to Saleem. 

And yet, Saleem picks Attock Petroleum as the company to watch out for. Why is this? Attock’s low debt and ability to restrict inventory losses. 

“We maintain APL as our top pick from the sector with high refinery upliftment restricting the damage of inventory losses, while healthy working capital provides additional cushion and retrenched market share provides stability,” says Saleem.

As for the future of the oil industry, the direction volumes completely depend on the easing of restrictions. As Saleem notes, “We believe there are thin chances of the government moving towards a lockdown hence the boom due to the ongoing crisis is behind us.” No lockdown might spell disaster for this country’s healthcare system and economy; but for now, at least, the oil industry is breathing easy. [/private]