Petroleum sales shaping up

FY16 was an eventful year for oil marketing companies (OMCs), be it the rising demand, low oil prices, or the revision in the pricing regime. With June 2016 data from OCAC, the sales by the OMCs for major petroleum products including petrol, diesel and furnace oil, touted an increase of five percent year-on-year to over 22 million tons. The same growth in FY15 was around 4.79 percent year-on-year. Petroleum imports, which make up for the rest of the consumption, also witnessed a growth of over 5 percent, year-on-year. The consumption of petroleum was primarily led by increased consumption of retail fuels, highlighted by increased sale of key petroleum products.

Product wise, motor gasoline (petrol) was the key behind the growth witnessed in FY16. In the fiscal, motor gasoline sales by the OMCs jumped by 22 percent year-on-year due to a clear substitution taking place over the last couple of years; petrol sales have gradually taken the place of CNG, which has been put a deceleration route since after the gas shortage in the country. Moreover, increased car sales have also contributed to increased consumption petrol.

While petrol sales stood at 5.76 million tons, imports of the same touched 4.2 million tons, up by 34 percent year-on-year, as per OCAC data. Month-on-month figures also show that petrol sales have been resilient, rising by over 14 percent year-on-year. If growth pattern is anything to go by (see illustrations), petrol sales are slated to grow in the coming years on account of returning economic activity highlighted by increased car sales, and use of petrol in home generators due to regulations against the use of gas.

The second common fuel, high speed diesel (HSD) has remained more or less stable over the years. In FY16, the petroleum product saw an increase of five percent year-on-year to 7.76 million tons, while its imports dropped by three percent versus FY15. The demand of HSD is usually determined by the happenings in the agriculture's transport sector. Hence, it is affected by seasonality. HSD is also largely consumed in passenger buses and vehicles having high-powered engines.

Furnace oil, the third fuel among the three common petroleum products used primarily in the power sector, has been on a downwards trajectory. it touched 8.87 million tons in FY16, down by four percent year-on-year. Its imports also a decline of around two percent year-on-year to six million tons from FY15. While the fuel saw an increase of over six percent year-on-year in volumes sold and over 18 percent year-on-year in imports, the 10 percent decline in furnace oil based generation in 11MFY16 was observed due to increased LNG based generation joining the system. And with the quantum of RLNG scheduled to increase further, furnace oil volumes can be knocked further.

Despite positive fundamentals and events, the oil marketing segment has largely underperformed the benchmark index in FY16. This has largely been due to bigger players like PSO, Shell, and APL losing their market shares to smaller players. One such firm is Hascol, which has seen its market share increase from 5.3 percent to 6.6 percent with volumes increasing by 31 percent year-on-year not only because of low base, but also expansion.

Here, it is important to note that overall petroleum sales are no longer a proxy for consumption in the country. with the addition of LNG into the system and being used by transport and power sector, and CNG hoping to come back online, these sales are likely understated.

It must also be noted that the with the revision in pricing regime of retail fuels, the profit margins are now linked to the annual CPI inflation with effect from July 1, 2016.

This will likely keep the margins at higher levels as inflation expectations are also on the rise, affecting the profitability of the OMCs positively.