Risks of oil market volatility – Newspaper

of Prime Minister Imran Khan aid package on petroleum products and electricity has come at the most difficult time. Amid volatility in international supplies and prices, its financing is becoming difficult, the budget hole is widening and suppliers are struggling to secure diesel when the harvest is at its peak, not only in Pakistan but in many countries. , from Vietnam to India and from Indonesia to Bangladesh. .

The supply situation is exacerbated by the Russian invasion of Ukraine and US-led oil and gas supply adjustments by European countries. Prospering on windfall profits, producers bother less to ramp up production, leaving the oil market in the hands of fund managers and hedge funds to make a killing in the paper market. Europe is willing to pay anything out of its deep pockets for what is available in the Middle East to offset the replacement of Russian oil and gas.

That leaves smaller importers like Pakistan at the mercy of speculative market participants and exponential premiums. This is making the domestic oil industry nervous at a time when it was already experiencing financial challenges. Imagine that state-owned and market leader Pakistan State Oil (PSO) has a pile of almost Rs 500,000 crore receivable and yet has to go the extra mile to increase imports beyond its normal responsibility.

Unfortunately, the operation of the recent oil price cut was based on $85-95 per barrel of oil and the exchange rate at Rs178. The situation changed when the prices exceeded 120 dollars and the exchange rate exceeded 180 rupees.

However, the market is becoming so unnatural and dirty that not even PSO got a single bidder for diesel cargo in the first half of April on the spot market, as long-term supplier Kuwait Petroleum expressed its inability to provide additional load. In the second round, a spot trader submitted a bid for a premium of $10.5, which is a record. The situation with other importers is no better. The next offer may be available even at a higher premium.

In recent weeks, PSO’s market share in diesel has increased by 3 percent to 53 percent and that of gasoline by another 2 percent to 43 percent, as some private companies appear to evade their obligations to supply. In fact, the market share of just four companies (PSO, Shell, Attock Petroleum and Total-Parco Pakistan) has risen to 84% from around 77% earlier this year. This meant a 7% cut in the combined market share of 30-something other oil trading companies (OMC). But this has a cost.

The question then arises that if the country has to have only four companies to meet fuel and strategic goals, what is the economic justification for 35 OMCs and nearly as many more in the pipeline, despite the unusual conditions? “Are they in the oil market just to trade when everything is going smoothly and make windfall profits?” asks a former oil secretary who advocates mergers and consolidations.

The prime minister had announced a 10 rupees per liter cut in oil prices and a price cap for four months amid the global upward trend. This led to the creation of price differential claims (PDC). Unfortunately, however, all of these jobs were based on $85-95 per barrel and an exchange rate of Rs178. The situation changed when the prices exceeded 120 dollars and the exchange rate exceeded 180 rupees.

To their credit, the government has moved quickly and has already transferred around Rs 20,000 crore to a special PSO account to make payments to the OMCs against their PDCs. The OMCs are now submitting their PDCs and would go through the fast and time-limited approval and payment mechanism.

The government had initially approved Rs20bn along with a procedure for payments to OMC and refiners on account of PDC to avoid a shortage of petroleum products in the country. However, Pakistan State Oil (PSO) pointed out that the procedure prepared by the regulator in consultation with the finance and energy ministries and approved by the Economic Coordination Committee was flawed and would lead to product shortages.

He noted that the PDC originated from the sale of petroleum products, while the reimbursement mechanism was based on the purchase of petroleum products. “OMCs will be lost if PDC reimbursement is based on acquisitions rather than sales and private OMCs can shy away from the market and stop selling products on the market,” PSO noted.

He stressed that consumers would only benefit from the PDC or the discount on petroleum products when the OMCs sell the product and “purchasing alone will not suffice” as companies would tend to hold back sales for inventory gains in times of rising prices and not to buy in times of falling prices, leading to shortages during the peak harvest season.

The PDC at the rate of Rs 2.28 per liter on diesel sales was calculated on February 28 when the price of crude oil was around $100 per barrel, but later increased to Rs 25 and Rs 32 per liter for gasoline and diesel. diesel, respectively, when the price of Arab crude rose to $118. per barrel. Thus, the amount of PDC increased to Rs 31,730 crore, including Rs 2,600 crore of PDC outstanding from 1st to 4th November. Thus, another Rs 11,730 crore was approved.

On the other hand, the five refineries had accumulated amounts of around Rs 23,000 crore due to outstanding unadjusted input sales tax. The oil industry as a whole has been facing working capital challenges due to large defaults from major OMCs and the resulting reluctance of banks to increase their credit lines in line with higher international oil prices.

Diesel stocks are currently at a reasonable level of 20-27 day coverage. Supplies already lined up apparently indicate no shortage issues until mid-May. However, like the LNG import defaults, the key concern for diesel also remains in the event of a failure by any supplier to opt into higher premiums offered by larger importers such as European customers.

Published in Dawn, The Business and Finance Weekly, March 28, 2022

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