The inventory of petroleum products—mainly high-speed diesel (HSD)—is building up to dangerous levels in the country due to higher imports in the past few months in a regulated industry. The ullage of refineries is choking, and they may have to lower production, which would result in imports of another major product—Motor Spirit (aka petrol).
Ideally, the industry should be deregulated, with refineries allowed to freely import and oil marketing companies (OMCs) to import as well. Market forces may push our old-aged refineries to upgrade or die. However, that is not the case, and currently, some OMCs are inflating demand and getting allowances from the regulator (OGRA) to import in excess.
As of 7th April, the country is carrying around 720K MT of HSD stocks. With daily demand averaging just 16K MT, this translates into 45 days of cover—well above the norm. While refineries continue to produce an average of 14K MT/day, and with the allowance of imports, an additional 138K MT is expected to arrive in April alone. Thus, in April, another 460K MT will be added to the system.
At the expected demand, by the end of April, HSD stocks could cross 800K MT—a high level that risks overflowing storage capacities and choking refinery ullage. The question is why OGRA is allowing higher imports when the country already has enough stocks and is losing foreign exchange. The question is why the OMCs inflated demand—and what the implications are.
Well, mainly two OMCs imported this year. One is the usual player—PSO—who imported 72 percent of the HSD, while Gas & Oil Pakistan (Go Petroleum)’s import share stood at 24 percent. The latter is a new player and was imported after Saudi Aramco became a shareholder in the company. Reportedly, the OMC is getting the product at a discount and is importing large volumes, which are being sold at a discount in the market. A similar case used to be with Hascol in previous years before the company got into financial problems.
The fate of Go Petroleum may not be like Hascol, as here, perhaps Aramco is dumping the product in Pakistan—especially when prices were higher. Now the inventory is built, and global oil prices have plummeted. OMCs are to make losses on inventory. That is the risk in the business, as they make inventory gains in days of prices moving up.
OGRA should be more vigilant and have a better assessment of market demand. It’s best not to involve the regulator in import decisions. Anyhow, now the country has high stocks, and soon, refineries will be publicly talking about it, and the government may restrict HSD imports in May and June—against the wish of importing OMCs—to let inventory levels normalize. This means the overall import bill remains in check, as oil and petroleum products are the biggest importing sector.
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