Pakistan plans to ramp up fuel oil exports in May to trim stocks amid sluggish power demand

Pakistan's oil refineries are planning to export around 100,000 mt of fuel oil in May to reduce stocks at their terminals and help run units at desired capacities, industry officials told S&P Global Commodity Insights May 17.

The South Asian country's fuel oil consumption has slowed in the recent months due to weak industrial demand from power companies as the government wants to produce electricity through cheaper alternatives such as coal, according to the officials.

Pak Arab Refinery Ltd (PARCO), which is a joint venture between the Government of Pakistan and the Emirate of Abu Dhabi, plans to export around 50,000 mt of fuel oil before the end of May, while Pakistan Refinery Ltd (PRL) has also finalized agreements to export fuel oil with one parcel of 27,000 mt currently loading and another cargo of 15,000 mt scheduled to be shipped within a week, the officials said.

This comes after PARCO has already exported around 107,000 mt of fuel oil between December and March, and PRL has shipped about 27,000 mt of the residual fuel in April, according to data from refinery sources.

"Looking at the current trends of demand... we do not foresee that Pakistan needs to import fuel oil for this summer," said, said Muhammad Awais Ashraf, head of research at Foundation Securities.

Pakistan has a fuel oil stock of 210,000 mt as of May 15, according to data from sources at oil refineries, with PARCO having an inventory of 95,000 mt, and PRL having about 50,000 mt, the data showed.

Fuel oil consumption has slumped 83% on the year to 70,000 mt in April, compared with 43,000 mt in the corresponding month a year ago, data from Oil Companies Advisory Council showed. Fuel oil consumption during the first 10 months of the current fiscal year totaled 1.87 million mt, compared with 3.1 million mt during the corresponding period a year earlier. Pakistan's fiscal year runs from July to June.

"Due to the addition of local coal [power generation], resumption of Neelum-Jhelum hydel power plant having a capacity to produce 969 MW of electricity, and an overall decline in consumption [due to higher tariffs and lower economic activity], the fuel oil-based generation is expected to remain low," said Tahir Abbas, head of research at Arif Habib Ltd., a Karachi based broking house.

Fuel oil demand has remained suppressed, and eventually the refineries are left with no other option apart from exporting fuel oil, said Abbas.

Pakistan, which typically used to be a net importer of fuel oil, is turning out to be an exporter in recent months and has added to the regional supplies, weighing on the Asian high sulfur fuel oil market fundamentals, trade sources said.

The overall HSFO market usually tends to see a seasonal uptick in demand from South Asian countries such as Bangladesh, Sri Lanka and Pakistan for higher power generation demand during the summer months, but traders said it has been much lesser than expected so far this year.

Bangladesh is likely to import around 350,000 mt of high sulfur fuel oil in May, down about 12.5% on the month, as the country plans to ramp up LNG imports from the spot market due to a recent drop in prices of the alternate fuel used for power generation, S&P Global reported earlier.

The benchmark Singapore 380 CST high sulfur fuel oil cash differential to MOPS 380 CST HSFO assessments, which has plunged more than 35% since the start of April, was assessed at a premium of $5.25/mt May 16, S&P Global data showed. Meanwhile, the Singapore 180 CST HSFO cash differential to MOPS 180 CST HSFO assessments was assessed at plus $4.33/mt May 16, down from $4.48/mt May 15.

The prompt M1-M2 FOB Singapore 380 CST HSFO intermonth swap spread has averaged at a backwardation of plus $4.89/mt so far in May, down from an average of $5.19/mt in April, S&P Global data showed.

Pakistan's electricity generation declined by about 16% year on year to 8,741 GWh (11,749 MW) in March, data from the National Electricity Regulatory Authority showed.

"I think export of fuel oil is positive for the refineries as the volume at storages will reduce and in turn they will run uninterruptedly, maintaining their throughput levels" said Abdul Azeem, head of research at Spectrum Securities.

Power generation backed by fuel oil is not a priority as the government wants to produce electricity mainly from coal, nuclear, hydel and LNG, Azeem said, adding that overall electricity demand was currently much lesser due to sluggish economic environment.