Pakistan's oil consumption downtrend likely to spill over to early 2023

A downtrend seen in Pakistan's oil consumption in the first six months of the current fiscal year (July 2022-June 2023), led by sluggish industrial activity, weak auto sales and lofty product prices, is likely to spill over to early 2023, analysts told S&P Global Commodity Insights.

Amid oil consumption falling by 19% on the year over July-June followed by a drop in transportation fuels demand in July-September stemming from devastating floods, Pakistan saw a slower economic recovery in October-December. This exacerbated by higher oil prices owing to economic woes likely led to a contraction in oil demand in 2022 from 2021 levels, according to Shreyans Baid, a Senior South Asia oil analyst at S&P Global.

"Pakistan's oil demand is likely to remain soft at least until the first quarter of 2023 and is likely to recover in the latter part of the year. Overall, we expect the 2023 Pakistan oil demand to grow on the year, although downside risks remain," Baid said, referring to a continued slowdown in industrial activity, economic challenges, and shortage of foreign exchange reserves.

Oil sales during the first six months of the country's fiscal year were at 9.03 million mt, compared with 11.10 million mt in the same period of the previous year, data from oil marketing companies and the Oil Companies Advisory Council showed.

Yousuf Saeed, head of research at Darson Securities, said that during these months industrial activity slowed substantially, resulting in relatively lower movement of heavy transportation commercial vehicles.

Additionally, many factories were either partially or fully closed as the shortage of foreign exchange reserves was prompting the country's central bank, the State Bank of Pakistan, to be cautious in making overseas payments, restricting the ability of industries to import raw materials in time to run their operations.

The country's foreign exchange reserves held by SBP for the week ended Dec. 23, 2022, reached $5.8 billion, the lowest in almost eight and a half years, and just enough to cover five weeks of imports.

Product sales head south

Motor gasoline sales during the six-month period that ended Dec. 31, 2022, dropped 15% on the year to 3.83 million mt. At the same time, diesel and fuel oil consumption dropped 23% on the year to 3.36 million mt and 24% on the year to 1.45 million mt, respectively, according to OCAC data.

"Gasoline sales declined on account of high prices while fuel oil sales declined due to lower demand from the power sector, as authorities relied on relatively cheaper sources for electricity production during the winter season," Saeed said.

Anand Kumar, an equity research analyst at Optimus Capital Management, also held similar views, saying monthly oil consumption declined on the back of lower fuel consumption in the winter season. Diesel demand also dropped significantly as sales to the agriculture sector dropped with the ending of the crop sowing season, resulting in reduced irrigation activity.

"Oil demand is expected to remain at low levels due to the economic slowdown and an expected rise in petroleum prices, which may happen due to an anticipated rise in general sales tax or higher levies on petroleum products," he said.

"We foresee the country's oil demand for the remaining months of the fiscal year to be about 9.9 million mt, taking the overall consumption in 2022-23 to 18.9 million mt, a decline of 16.1% on a year-on-year basis," Kumar added.

On a monthly basis, motor gasoline sales in December 2022 were around 620,000 mt, down 11% from 700,000 mt of the same month in 2021, while diesel consumption fell by 15% to 520,000 mt and fuel oil by 3% to 120,000 mt over the same period, OCAC data showed.

Yusuf Rahman, a research analyst at KASB Securities said that motor gasoline sales would remain under pressure because of the general economic slowdown and subdued vehicle sales.

"We think the winter months will keep fuel oil demand subdued. Looking forward, the addition of electric capacity using relatively cheaper inputs, particularly those originating from Thar Coal Fields, will keep fuel oil-based plants lower in the merit list order," Rahman said.

In the seven-month period that ended December, gasoline and diesel prices were up by 43% and 56% to Pakistan Rupees 214/l and Rupees 227/l, respectively. The prices were raised as the government had cut the subsidy amount to meet IMF conditions and get the required loan from it to bail out the country from a difficult economic situation.

Zeeshan Azhar, a research analyst at Foundation Securities, said that high interest rates and elevated oil prices in Pakistan amid the Ukraine-Russia war would also take a toll on oil consumption in the foreseeable future.