The demand for petroleum oil products has hit a five-month low at 1.12 million tonnes in February due to increased prices, sluggish industrial activities, the transition of agriculture tube wells from diesel to solar power, and the introduction of new local coal-based and nuclear power plants replacing furnace oil-run generation plants.
According to oil sales data compiled and reported by Arif Habib Limited, overall demand decreased by 8% to 1.12 million tonnes in February compared to the same month last year. Additionally, demand dropped by 19% compared to January 2024.
In the first eight months (Jul-Feb) of the current fiscal year 2023-24, the demand for oil products decreased by 13% to 10.18 million tonnes compared to 11.69 million tonnes in the same period last year.
Speaking to The Express Tribune, Mohammad Awais Ashraf, Director of Akseer Research, highlighted that the upward trend in petroleum oil prices has squeezed people’s purchasing power, leading them to reduce their reliance on expensive products.
Additionally, an economic slowdown, exacerbated by sluggish industrial activities, also contributed to the decrease in demand for these products in the domestic economy.
According to the Pakistan Bureau of Statistics (PBS), the price of high-speed diesel increased by almost 3% to Rs288.39 per litre in February 2024 compared to Rs280.85 per litre in the same month of the previous year.
Similarly, the price of super petrol increased by 1.39% to Rs276.66 per litre in the month compared to Rs272.86 per litre in the corresponding month of the previous year.
Ashraf noted that the demand for petrol remained stagnant, falling by only 1% this February compared to the same month of the previous year. However, the notable increase in diesel price resulted in a 7% reduction in its demand compared to February 2023.
He noted that diesel is primarily used by farmers and industrialists. A considerable number of farmers have transitioned their tube wells to solar power systems from expensive diesel-based ones, facilitated by government and central bank initiatives to install cost-effective and environmentally friendly solar equipment.
Additionally, the reduced demand for diesel in agricultural practices in February can be attributed to the limited need for watering crops and minimal use of tractors in the fields during this period.
He mentioned that the use of diesel in industries also remained stagnant due to moderate industrial output in the country.
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The senior research analyst observed a significant decline of 56% in furnace oil consumption in February compared to the same month of the previous year, following the commissioning of new local coal-based and nuclear power plants in Pakistan.
With the availability of better and low-cost power options, the government opted to phase out expensive furnace oil-based generation, thereby reducing the demand for costly fuels like furnace oil and diesel in the system.
The cost of furnace oil-based power production has risen to Rs35-36 per unit (fuel cost only) at present, compared to around Rs29 per unit approximately this time last year. Similarly, diesel-based generation now costs Rs45-46 per unit.
In contrast, local coal-based power costs Rs12 per unit, and nuclear power costs Rs1.33 per unit (fuel cost only) in the country.
He anticipates that the demand for petroleum oil products may remain stagnant, near current levels, in the remaining four months of the ongoing fiscal year 2023-24.
The full-year demand for the products in FY24 may decrease by 10-12% compared to the previous year, FY23.
He mentioned that industrial demand for petroleum products would likely remain sluggish, as the high-interest rate would continue to discourage businessmen from increasing industrial output.
Ashraf anticipated that the central bank would maintain its policy rate at the current level of 22% for the remaining four months of FY24. He suggested that the bank might make its first rate cut in September 2024, which contradicts the general consensus among financial experts that the bank would make the first cut in the rate in March or April 2024.
He noted that Pakistan is poised to enter a new International Monetary Fund (IMF) loan programme once the current $3 billion one ends in March-April 2024. The potentially challenging negotiations during that period with the leading lender team might hinder the central bank from cutting the rate in March-April 2024.
Furthermore, he highlighted that if oil prices rise in international markets due to a surge in global demand preceding a softening of interest rates in world markets or due to geopolitical tensions, the demand for petroleum products in Pakistan may further decline.
Published in The Express Tribune, March 3rd, 2024.
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