ISLAMABAD: As an oil crisis looms that will eat up stocks, the government is likely to freeze petroleum product prices till June 15 in a bid to minimise volatility risk for the oil industry and stave off heavy inventory losses.

Sources told The Express Tribune that the Economic Coordination Committee (ECC) was set to take decision in a meeting scheduled for Saturday. The Petroleum Division has pitched two proposals for ECC’s approval.

To avoid any shortage of petrol from June onwards, the Petroleum Division said the government needed to address the fundamental pricing issue by minimising volatility risk, reducing price risk from 30 days to 15 days and creating visibility in the price index.

Therefore, the forthcoming petroleum price revision may be announced from June 16 rather than from June 1, , the Petroleum Division said, adding that it would provide an incentive for oil marketing companies (OMCs) to import products at such prices at which Pakistan State Oil (PSO) was importing oil cargoes and thereby avoid inventory losses.

It said a previous decision of the cabinet taken on August 31, 2016 already allowed the fortnightly price revision.

The Petroleum Division said ex-refinery prices may be based on the average fortnightly/monthly Platts price plus premium (average premium based on the tender awarded by PSO) including PSO’s incidentals and ocean gain/loss taxes, etc as per the current practice.

This mechanism would be the basis for determining selling prices for both refineries as well as OMCs.

At present, the prices of petroleum products are determined under the ECC’s decision, whereby refineries are allowed to fix and announce ex-refinery sale prices on a monthly basis.

This is subject to the condition that ex-refinery prices of petroleum products cannot be more than PSO’s average actual landed price for imported cargoes of the previous month, which are priced on a cost and freight basis, and a five-day average of the Arab Gulf Market Platts price around the date of Bill of Lading.

In case of unavailability of PSO’s import prices, the ex-refinery prices are fixed as per the import parity pricing formula on the basis of prices published by the Platts Oil Gram for the Arab Gulf market. OMCs follow the same process with PSO’s benchmark being the price cap.

PSO has historically imported approximately four vessels each of high-speed diesel and petrol every month. Each cargo covers five pricing days.

The current pricing mechanism would generally mean that any current month’s price is roughly based on the average of previous month’s Platts prices (given there are 20-22 pricing days in a month).

There are over 10 active OMCs importing oil and they are bound to follow PSO’s price cap provided it makes commercial/business sense to them.

The present system of monthly price adjustment based on PSO’s previous month procurements, serves as a disincentive, especially when there is volatility in the market. Therefore, OMCs are reluctant to import when margins are unfavourable and instead let the inventory run dry. This, in turn, results in supply side insecurity at the national level.

“If we do not change the mechanism and continue with the present pricing regime, there is a high likelihood that not only would refineries curtail their production but also imports by OMCs (other than PSO) will be insufficient to meet demand, leading to widespread shortages/dryouts,” said the Petroleum Division.

It added that the proposed mechanism may allow OMCs to reduce inventory losses in the first 15 days and thereafter alignment with market conditions would be happening automatically.

Published in The Express Tribune, May 30th, 2020.

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