KARACHI – International oil prices continue to stay stable; however, political uncertainty on the domestic front has forced the government to hold back on the oil price increase. This time round, the government would have three options i) base-case: reduction of deemed duty to five percent and the residual price increase passed on to the consumer, ii) passing-on the full impact of last four-months price increase and iii) subsidising oil prices.
Eruption of civil unrest in the MENA is keeping international crude oil price firm. During February MTD, Arab Light crude oil prices climbed by a monthly five percent to an average $99 per barrel and subsequently pulling-up petroleum product prices in the range of one percent (Naphtha) to 12 percent (HSFO) monthly.
Under base case scenario, with PL and other option already exhausted, the government is expected to reduce the deemed duty on HSD by five passing, while the residual price hike is passed onto the final consumer, said Nauman Khan at Topline. In this case, we expect retail petroleum prices to increase by a monthly average of nine percent.
In case-2, the government may pass on the entire price hike of the last four-months to the final consumer in order to meet its commitment to International Monetary Fund (IMF). Thus, Petroleum Levy (PL) would revert back to its original levels of Rs 10 (petrol) and Rs 8.0 per liter (HSD), resulting in an average monthly price increase of 17 percent.
On the other extreme, government may once again opt to keep prices unchanged and provide subsidy in the form of Price Differential Claim (PDC). The expected subsidy of Rs 3.0 to Rs 4.0 billion per month, likely to grow in the coming months in case of further upward pressure on international crude prices, would downplay chances of the latter two on account of adverse political ramifications and strain on the fiscal space.
The base case scenario would have a negative impact on refinery sector profitability, while the other two options will have no direct impact. Furthermore, for other players in the in the oil chain, it is anticipated that the development will have no bearing on their profitability. As per calculations, reduction in deemed duty to five percent would push domestic core-refinery GRMs into negative at $1.8 per barrel, down by a massive 40 percent.
However, recovery in petroleum spreads has created a buffer for refineries with superior product mix ATRL, while NRL will continue to enjoy the benefit arising from its lube business. Estimates suggest that reduction in deemed duty to five percent would decrease ATRL and NRL FY11 earnings by Rs 3.0 and Rs 4.0 per share, respectively, he said.
