Gulf disruptions, surging costs worry oil industry

Pakistan's oil industry is facing mounting concerns over the availability and cost of crude oil and petroleum products as prices in the Middle East skyrocket, while repeated changes in the domestic pricing formula are making it increasingly difficult for refineries and oil marketing companies (OMCs) to secure supplies on commercially sustainable terms.

Industry officials fear that continued attempts to suppress the impact of international prices through adjustments in the pricing mechanism, rather than reducing government taxes and levies, could discourage imports and create shortage of petroleum products in the country. The pressure is particularly relevant for Pakistan because its high-speed diesel (HSD) pricing mechanism is now anchored to the Platts Cash Dubai crude benchmark, making developments in the Middle Eastern crude market directly relevant to the domestic petroleum prices.

Under the revised system, the Oil and Gas Regulatory Authority (Ogra) uses a seven-working-day rolling average of Platts Cash Dubai as the crude base for calculating HSD prices. The formula also incorporates the HSD spread and the Saudi Extra Light official selling price differential.

Market data for September 9 showed a sharp increase in the regional crude complex, adding to concerns over the cost of procuring barrels for Pakistan. Dubai Mo01 (NextGen MOC) was indicated at $122.01 per barrel, registering an increase of 11.21%. The spike is particularly significant for Pakistan following the government's decision to use Dubai crude as the anchor for HSD pricing.

Another important market indicator, Murban IFAD FOB Fujairah versus Dubai, stood at $26.24 per barrel, up 9.61%. Murban IFAD refers to Murban crude traded through the ICE Futures Abu Dhabi (IFAD), with physical delivery linked to Fujairah in the United Arab Emirates. The Murban-versus-Dubai figure is not the outright price for Murban crude. Rather, it represents the differential, or premium, at which Murban is valued relative to the Dubai crude benchmark.

In simple terms, the $26.24 differential indicates that Murban is commanding a substantial premium over the referenced Dubai value. Such premiums are important because the benchmark alone does not necessarily represent the price at which an importer can actually secure physical crude.

Middle Eastern crude grades can trade at premiums or discounts to their underlying benchmarks depending on supply, demand, quality and availability. When supplies become tight, the premiums can rise sharply. For Pakistan, this means the impact can come from two directions – an increase in the Dubai crude benchmark as well as a higher premium to secure physical crude. Regional disruptions have tightened the availability of crude and petroleum products, while sellers are demanding higher premiums for physical cargoes. Freight, insurance and financing charges are also adding to the landed cost of imports.

"The benchmark may say one thing, but the real question is at what price a physical cargo is available," an industry source said. "If suppliers are asking for a significant premium and that cost is not recognised in the formula, somebody has to absorb the difference."

Companies have to book crude and petroleum product cargoes in advance, arrange Letters of Credit and commit substantial working capital. Industry officials said frequent changes in the pricing formula were making those procurement decisions increasingly difficult because companies could not be certain that their actual costs would ultimately be recognised in domestic prices.

The problem is not confined to crude oil. The availability of finished petroleum products has also tightened across the region, making it difficult to secure cargoes at normal premiums. "This poses an additional risk because any shortfall in domestic refinery production has to be covered through imports of finished petroleum products, particularly diesel and petrol," the industry official cautioned.

Industry sources said suppliers were factoring regional supply risks into their offers. Pakistan could, therefore, find itself competing with other buyers for limited cargoes, forcing importers to pay higher premiums.