Cheaper Iranian oil attracts inflation-hit Pakistani consumers: report

Pakistani consumers are rapidly shifting to cheaper Iranian fuels, reducing volumes at local refineries, according to S&P Global.

The news comes as overall petroleum product sales in Pakistan fell by more than 46% year on year, totaling 1.17 million tonnes in April 2023.

The drop in sales is “largely due to higher petroleum prices, an economic slowdown, an increase in smuggled petroleum products from Iran, and lower furnace oil (FO)-based power generation,” according to a note issued previously by Arif Habib Limited (AHL).

Furnace Oil sales fell by 83% year on year in April 2023, totaling 0.07 million tonnes. MS (petrol) sales declined 24% year on year in April, totaling 0.58 million tonnes. High-Speed Diesel (HSD) volume fell by 50% year on year, finishing at 0.46 million in April 2023.

“A shortage of dollar reserves and a faltering Pakistani currency have also kept fuel prices high in the country, prompting small private trading companies and individuals with a business network in Iran to purchase heavily discounted diesel,” Tahir Abbas, head of research at Arif Habib Limited (AHL), was quoted by S&P Global as saying.

Along with a slew of economic issues, Pakistan is also dealing with record-high inflation, with the latest headline data in April 2023 ringing in at 36.4% year on year.

Meanwhile, according to the S&P Global report, which cited Insight Securities, a Karachi-based brokerage firm, the widespread availability of Iranian diesel, particularly in Pakistan’s southern region, is having a negative impact on refiners’ diesel sales due to a significant price spread between Pakistani and Iranian barrels.

There is a huge pricing difference between Pakistani and Iranian barrels.
According to the study, which cites industry observers, the typical retail price of diesel in Pakistan is roughly Rs288 per litre, compared to Iranian diesel, which is available at Rs230 per litre, providing large profit margins to those selling Iranian diesel.

“Between 35,000-60,000 barrels per day of diesel could have flowed into the domestic market under the radar in recent months through southern sea and land transportation routes, and it’s possible that the volumes could rise,” said the report, citing estimates from an Attock Refinery senior executive and a middle distillate distribution management source at Pak Arab Refinery, or PARCO.

“Infiltration of Iranian diesel is growing, and it could substitute as much as 25%-30% of Pakistan’s total diesel sales,” a private dealer told S&P Global.

According to the study, the influx of Iranian diesel has also resulted in billions of rupees in government tax losses, according to refining industry players.

“The government either doesn’t understand the gravity of the situation or is simply turning a blind eye due to a lack of foreign exchange reserves required for legal imports of deficit products,” stated the CEO of Attock Refinery.

“Smuggling of petroleum products from Iran has always existed to a limited extent in collusion with border authorities, but [it] has never been on this massive and unprecedented scale, which if allowed to continue unabated, may lead to the closure of local refineries,” the executive warned.

Attock Refinery said earlier this week that it will temporarily suspend operations due to insufficient input of High-Speed Diesel (HSD) by Oil Marketing Companies (OMCs).

“We wish to inform you that HSD upliftment by OMCs from ARL has remained low during the last two months due to multiple reasons, including the possible inflow of smuggled product in our supply envelope,” ARL said in a note to the Pakistan Stock Exchange.

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