Oil substitution to fuel diesel demand, bleed oil cos more

Oil marketing companies had better brace for bigger losses as demand for diesel goes through the roof. It isn’t just car buyers who are going for the ‘cheaper’ fuel, but even industries are increasingly reaching for it to save on their soaring fuel oil, or furnace oil, costs.
Going by the Petroleum Planning and Analysis Cell (PPAC), a statistical body under the Ministry of Petroleum and Natural Gas, between April 2011 and January 2012, out of the overall growth of petroleum product consumption in the country, 68% was contributed by diesel alone.
“This is one more indicator of dieselisation of the economy,” said a PPAC report. “This trend is likely to continue with diesel price remaining lower in comparison to other competing fuels.”
Consumption of diesel, in fact, jumped 7.6% in January, while that of other petroleum products together grew a modest 2.3%.
Sale of fuel oil, on the other hand, posted a negative growth of 17.3%, hinting at a rapid substitution by the former. The negative growth in fuel oil is expected to continue as long as its price in international markets remains higher than domestic price of diesel, said PPAC.
While fuel oil and petrol are deregulated and sport market-linked prices, diesel is controlled by the government.   

Diesel is currently available at a rate of Rs45.28 per litre as against Rs70.65 per litre for petrol and Rs36 per litre of fuel or furnace oil.

With international crude prices shooting up in recent times, petrol prices too have increased and are expected to increase further. This has led to a shift in customer preference in favour of diesel vehicles. So much so, automobile makers have begun scaling up their diesel capacities substantially.

And now, diesel is also fast replacing fuel oil, or furnace oil, in applications such as power generation for factories and telecom towers.

“Power constitutes almost an average 40% of the production cost for industries in general. Now, since companies these days have a fungible multi-fuel model, they always tend to use the cheapest fuel in their generators,” said a top ranking official from Bharat Petroleum.

He said power generation applications consume close to 15 million tonne of fuel on an annual basis and companies are increasingly preferring to use diesel instead of fuel oil, leading to a higher demand and sale of the product.

Analysts Nilesh Banerjee, Rosa Kim, Patrick Tiah and Vikas Jain from brokerage Goldman Sachs, said as much in a March 15 report. “With the regulated diesel prices in India fixed since June ‘11, fuel oil is now effectively 20% dearer than diesel, leading to a likely switch from fuel oil to diesel in factories and power plants, in our view.”

This would likely keep India’s diesel supply-demand tight during the peak power demand summer season, despite 400,000 barrels per day of new refining capacity coming in India in 1H12, the Goldman analysts noted.

For the oil marketing companies, however, the increase in demand for diesel means an increase in under-recoveries, which, in turn, will bear on the subsidy bill, expected to reach its historical peak next financial year.

Oil marketing companies such as Indian Oil, Bharat Petroleum and Hindustan Petroleum are currently posting a loss of Rs13.10 per litre on sale of diesel and have posted a loss of Rs56,732 crore for the period April to December 2011.