Ministry advises ECC not to cut oil prices for fortnight

Updated May 30 2020

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Major supply disruption feared in case of price cut. — AFP/File
Major supply disruption feared in case of price cut. — AFP/File

ISLAMABAD: The petroleum division has formally called for putting on hold, until June 15, the proposed downward revision in oil prices for the next fortnight to allow the industry to recoup some of its losses by selling at existing rates.

The suggestion was made in a summary prepared for a special meeting of the Economic Coordination Committee (ECC) called for Saturday (today).

The sources said the energy ministry had warned the ECC that a reduction in petroleum prices would create a major supply disruption, which may take weeks and months to normalise as stocks with most of the OMCs were abnormally low.

The ministry did not mention in its summary that it was mandatory for OMCs and refineries under their licences to maintain stocks sufficient for 21 days.

Major supply disruption feared in case of price cut

In another development, the government is considering a proposal to switch over from the monthly pricing of petroleum products to fortnightly basis in order to protect oil marketing companies (OMCs) and refineries from losses brought about by falling prices in the international market

The summary moved to the ECC and seen by Dawn claims that an Aug 31, 2016, decision of the federal cabinet provided room for fortnightly price adjustments, but it remained unimplemented.

To address that challenge, the petroleum division has built a case for fortnightly pricing, but with no change for the first 15 days until June 16. “Therefore, the new prices may be announced from June 16 rather than from June 1,” the petroleum division said. It added this move would serve as an incentive to OMCs to import products at the current PSO rate and avoid inventory losses.

It has proposed that ex-refinery price should be based on the average of fortnightly or monthly Platts price plus premium (average premium based on the tender awarded by PSO), including PSO’s incidentals and ocean losses and taxes in keeping with the current practice.

This mechanism shall be the basis for determining the selling prices for both refineries as well as OMCs.

To avoid any possibility of shortage of petroleum products from June onwards, the petroleum division wants to address the fundamental pricing issue by minimising the volatility risk through reduction in the price risk from 30 days to 15 days and creating visibility of pricing index.

The petroleum division has warned that if the government does not change the mechanism and continues with the present pricing regime, there is a probability that not only would refineries curtail their production but also imports by OMCs (other than PSO) would be insufficient to meet the demand. This could lead to widespread shortages and dryouts.

The proposed mechanism will “allow OMCs to reduce inventory losses during the first 15-day period, but thereafter alignment with market conditions will be happening automatically”, the summary noted.

It explained that prices of petroleum products were currently determined under the ECC’s decision of Oct 15, 2010, and Aug 16, 2011, under which refineries are allowed to fix and announce the ex-refinery sale prices on monthly basis.

This is subject to the condition that the ex-refinery price of petroleum products cannot be more than the PSO’s average actual landed import price of the previous month. The PSO’s import is priced on C&F basis on a five-day average of the Arab Gulf Market Platts price around the date of the Bill of Lading.

In case of non-availability of PSO’s import prices, the ex-refinery price is fixed as per import parity pricing (IPP) formula on the basis of prices published by the Platts Oil Gram for Arab Gulf Market. Oil marketing companies follow the same process with PSO’s benchmark as the price cap.

The PSO usually imports four vessels each of HSD and petrol every month, spread out roughly evenly over 30 days. Each parcel covers five pricing days. The current pricing mechanism will mean that any current month price is roughly based on the average of the previous month’s Platts prices.

At present, there are more than 10 active oil-importing companies and they are bound to follow PSO’s price cap provided it makes commercial business sense to them. “The present system of monthly price adjustment based on PSO’s procurements for the outgoing month serves as a disincentive, especially when there is volatility in the market,” the petroleum division said.

It reported that OMCs were not keen on imports when the margin was unfavourable and instead let the inventory run dry. This causes nationwide supply side insecurity.

It has proposed that ex-refinery price should be based on the average of fortnightly or monthly Platts price plus premium (average premium based on the tender awarded by PSO), including PSO’s incidentals and ocean losses and taxes as per the current practice.

This mechanism shall be the basis for determining the selling prices for both refineries as well as OMCs.

Published in Dawn, May 30th, 2020