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Investment Guru India 2018-05-15 00:00:00

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Petroleum consumption grew a modest 4.4% to 17.7 mn tons in April 2018 despite the low base of last year, reflecting moderation in demand for diesel and industrial fuels. Marketing margins on auto fuels also moderated sharply over the past three weeks given the lack of price hikes before Karnataka elections amid a sharp increase in global crude/product prices. OMCs have started increasing retail prices now, but the ask-rate remains high at `4-5/liter to earn normative margins at MTM levels. We remain cautious on the stocks given continued macro headwinds.

Steep `4-5/liter increase in retail prices of auto fuels desirable to earn normative margins

Our computation suggests that downstream OMCs are required to increase retail prices of diesel by a steep `3.5-4/liter and gasoline by `4-4.55/liter in the coming weeks to earn normative gross marketing margins of `2.7/liter, assuming global price of diesel and gasoline and Rupee-US Dollar exchange rate remain stable hereon. We note that the lack of price hikes over the past three weeks, before Karnataka elections amid a sharp increase in global crude/product prices, has resulted in sharp moderation in gross marketing margins to around `0.5-0.7/liter on the basis of fortnightly rolling average of global product prices and a loss of – `0.6-1/liter at current levels of global product prices and exchange rate.

Modest 2.7% growth in diesel despite a low base; 9-14% growth in gasoline and jet fuel

Diesel consumption grew by a modest 2.7% yoy to 7.2 mn tons despite a low baseline growth of 3% in April 2017; growth has slowed down as compared to 6-8% over the past two months, 6.6% in FY2018. Gasoline consumption remained buoyant increasing by a robust 9.3% yoy to 2.3 mn tons as compared to 10-16% over the past four months and 10.1% in FY2018. ATF demand growth was stronger with increasing domestic passenger traffic, as consumption grew by a strong 13.5% yoy as compared to 8-12% over the past three months and 9% in FY2018.

13% growth in LPG even as pace of decline in kerosene consumption moderates

The consumption of LPG increased sharply by 13% yoy as compared to 8-9% over the past two months and 8% in FY2018, indicating plausible pickup in off-take by BPL households connected under PMUY scheme. The pace of decline in consumption of kerosene reduced to 7.4% yoy as compared to nearly 29% in FY2018, perhaps indicating limited scope of reduction in PDS quotas for states in the current fiscal year.

Weaker off-take of industrial fuels—8.6% decline in fuel oil and 1% decline in pet coke

The demand for industrial fuels seems to have slowed down—(1) fuel oil consumption declined 8.6% yoy as compared to a decline of 5.5% in FY2018 indicating an increase in substitution by LNG due to favorable economics and (2) pet coke declined by 1% yoy and lubricants/greases remained flat as compared to 9% growth in both during FY2018. Naphtha consumption increased by 6% yoy as compared to a 5% decline in FY2018.

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