Cheaper Iranian oil attracts inflation-hit Pakistani consumers: report

Marred by back-breaking inflation, Pakistani consumers are rapidly moving towards cheaper Iranian fuels hurting volumes of local refineries, S&P Global reported.

The development comes as sale of total petroleum products in Pakistan also plunged over 46% year-on-year, clocking in 1.17 million tons in April 2023.

The decline in sales “is majorly attributable to higher petroleum prices, economic slowdown, an increase in smuggled petroleum products from Iran, and lower furnace oil (FO)-based power generation”, said Arif Habib Limited (AHL) in a note earlier.

Furnace Oil sales nosedived by 83% YoY in April 2023, amounting to 0.07 million tons. Sale of MS (petrol) fell 24% YoY, clocking in at 0.58 million tons in April. Volume of High-Speed Diesel (HSD) plunged by 50% YoY, settling at 0.46 million in April 2023.

“A shortage of dollar reserves and faltering Pakistani currency has also kept fuel prices high in the country, prompting small private trading companies and individuals with a business network in Iran to purchase heavily discounted diesel,” Tahir Abbas, head of research at Arif Habib Limited (AHL), was quoted as saying by S&P Global.

Alongside a list of economic woes, Pakistan is also facing record-high inflation, with the latest headline figures clocking in at 36.4% on a year-on-year basis in April 2023.

Meanwhile, the S&P Global report quoting Insight Securities, a Karachi-based brokerage house, said that the widespread availability of Iranian diesel, especially in the southern region of Pakistan, is having a negative impact on refiners’ diesel sales due to a significant price spread between Pakistani and Iranian barrels.

The report, citing market observers, said that the average retail price of diesel in Pakistan is around Rs288 per litre, as compared to Iranian diesel which is available at Rs230 per litre, offering significant profit margins to those selling Iranian diesel.

“Between 35,000-60,000 barrels per day of diesel could have flowed into the domestic market through southern sea and land transportation routes under the radar in recent months and it’s possible that the volumes could rise,” said the report, citing estimates from a senior executive at Attock Refinery and a middle distillate distribution management source at Pak Arab Refinery, or PARCO.

“Infiltration of Iranian diesel is growing and it could substitute as much as 25%-30% of Pakistan’s total diesel sales,” a private dealer told S&P Global.

The report said that the influx of Iranian diesel has also led to losses to the tune of billion of rupees in government taxes, refining industry participants said.

“The government either doesn’t understand the gravity of the situation or is just turning a blind eye due to shortage of foreign exchange reserves required for legal imports of deficit products,” the Attock Refinery executive said.

“Smuggling of petroleum products from Iran to a limited extent has always been there in connivance with border authorities, but [it] has never been on this huge and unparalleled scale, which if allowed to continue unabated, may lead to local refineries’ shutdown,” the executive said.

Earlier this week, Attock Refinery announced that it will curtail its operations on a temporary basis, amid low intake of High-Speed Diesel (HSD) by Oil Marketing Companies (OMCs).

“We wish to inform you that HSD upliftment by OMCs from ARL has remained low during the last two months due to multiple reasons including the possible inflow of smuggled product in our supply envelope,” ARL said in a notice to the Pakistan Stock Exchange.