Petroleum sales under pressure?

A look at the monthly sales by the OMCs show that furnace oil volumes have been the lowest in at least the last six years, which has been because of the government’s policy plan to gradually phase out furnace oil. Furnace oil volumes for April-18 were down by 51 percent, year-on-year, while the month-on-month increase has been negligible (0.5 percent MoM).

But the furnace oil imports have now been allowed again. This does not come as a surprise as temperatures across the country soar, and load-shedding rear its head once again. (Also read: Furnace oil coming back, published on April 10, 2018). The government has lifted the ban on import of furnace oil to meet growing electricity demand in summer season. And the coming months will depict the rise in not only furnace oil sales but also imports.

Overall, furnace oil volumes sold by the OMCs in 10MFY18 are down by 27 percent, year-on-year, which is the key reason for a drag on petroleum product sales during the period. Retail fuels i.e. Motor Spirit and High Speed Diesel continued to propel growth in overall volumes, increasing by 11 and 8 percent, year-on-year respectively in 10MFY18.

While the market believes that there will be higher off take of petroleum products due to increased furnace oil demand by the power sector, there are some pressures on the petroleum products that might restrict the ongoing growth momentum.

First, rising prices for petrol and diesel recently have the ability to stifle the demand in peak summer times? Average pump prices for petrol and diesel have seen around 20 percent year-on-year increase in 4MCY18. Continued increase in international oil prices along with the rupee depreciation and government’s higher revenue targets (in shape of sales tax and Petroleum Levy envisioned in Budget FY19) could put pressure on demand for retail fuels.

On the other hand, the government also announced a reduction in GST in furnace oil from 20 percent to 17 percent. This should have insignificant impact on the sector due to declining demand for FO. However, if furnace oil demand picks up again and is unabated, this could provide a boost to its consumption in the power sector. At the same time, lowered sales tax rate from 20 to 17 percent on LNG import for FY19 along with abolishment of 3 percent VAT on LNG import proposed in the budget is likely to lift further import of LNG – a replacement of furnace oil in the power sector, thus restricting furnace oil demand.