Petroleum sales heightened

Motor gasoline (petrol) sales have been the highest ever at 566,274 tons in May 2016; high speed diesel (HSD) has set a new record of 886,520 tons in the same month; furnace oil seems to be returning to its elevated self as well. Petroleum products have been moving up to cater to the rising demand.

Higher furnace oil volumes by the oil marketing companies have been the result of power demand peaking at this time of the year (summer and Ramadan), fuelling increased consumption of furnace oil as the country's power generation is still tilted towards thermal sources. The same is depicted in higher month-on-month furnace oil sales. However, year-on-year analysis for 11MFY16 shows a decline of six percent due to lower reliance on furnace oil for power generation as a whole.

Rising car sales, CNG curtailment and lower prices have been powering petrol sales all year long with 11MFY16 volumes rising by 23 percent year-on-year. Similarly, diesel volumes have been heading north since March 2016. However, the increase in diesel volumes is more of a cyclical nature as May and June are key harvesting and sowing months in agriculture sector with increased tractor activity - the main consumers of HSD.

Looking at the imports, similar trends can be seen. However, it must be noted that the furnace oil imports in May 2016 did not increase as much as the furnace oil sales volumes; they actually increased in March and April 2016, showing that the OMCs retain an inventory (of approximately 30 days) for smooth supply.

Here, it is important to note that overall petroleum sales, which have been taken as a proxy for energy consumption in the country, might not reflect the true demand anymore. Talking to BR Research, Fatiq Khursheed of Optimus Capital Management highlighted that the monthly petroleum sales are understated with the addition of LNG into the system; LNG is substituting furnace oil as it is primarily being used in the power generation industry; it is also substituting petrol and to some extent diesel as it is being supplied to the CNG stations and is being used by tractors.

Another reason for increased consumption in the country has been lower energy prices. Recently, the government reduced sales tax on petroleum products to keep prices unchanged in June 2016. This decision was taken even after OGRA recommended an increase in prices to make up for the rebound witnessed in oil prices recently. It might be too long before the government finds it unable to continue with its populist move as crude oil has been heading north for some time now.