Pakistan OMCs: More pain to come?

April 15, 2020 (MLN): Local Oil Marketing Companies (OMCs) are suffering from inventory losses as they have to bring down refinery sources due to reduced demand for fuel after lockdown across the country to contain the deadly COVID-19 spread.

According to the research report by AKD, it is expected that the volumes of OMS to decline in 4QFY20 where Motor Spirit (MS) is expected to be the worst affected among the major fuels due to severe restrictions on individual movement than industrial. Not only this but Jet fuel (JF) is also on the hit list as authorities have extended the closure flight operations till April 21, 2020, which can register historic lows.

Considering the extended lockdown in other countries, the restrictions can remain in place even post 4QFY20 that can affect the volumes for 1QFY21 if economic activity remains slow to resume, the AKD research estimated.

To gauge the impact of lockdown on demand of retail fuels, a 100k decline in volumes of MS/HSD results in a decline in earnings of PSO and APL. Another blow for PSO is a delay in the issue of Sukuk-II coupled with the delay in recoveries from the LNG supply chain and an increase in the burden of short term borrowing by the power sector, resulting in higher finance cost, as per the research of AKD.

Crashing oil prices came as a dampener for 3QFY20 as it will push the OMCs’ bottom line into the red. Local OMCs are expected to endure heavy inventory losses in 3QFY20 on retail fuels on the back of a decline in oil prices by 56.1% in March’20 from a high of USD51.9/bbl to USD22.8/bbl as a result of the oil price war between Saudi and Russia led to significant oversupply in the market.

However, international players of OPEC+ reached to an agreement of oil-cut production last week. Now, oil prices have a tendency to move upward, therefore, a reversal in profitability cannot be ruled out for 4QFY20 or 1QFY21, resulting in inventory gains, the report said.

As a result of hot money outflows and exchange rate volatility, added salt to the wounds as local  OMCs are expected to incur exchange losses into 3QFY20 on the back of importing POL products in March to gain benefits from cheaper rate compared to ex-refinery rates built in the prices. On the other hand, ECC, in its recent meeting, agreed to adjust the exchange losses for 2 months which may provide some solace if the provision is included in the prices.  

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