Oil companies will have more than 3.5 million tonne of surplus petroleum products, just when oil prices are at a pitch and yet, say industry watchers, the lucre may lie in the home market. Liberalisation has made petroleum products sensitive to world market trends. The resulting ``import-parity'' price is the FOB (Free On Board) price of oil, along with freight, port charges and levies.

The export price is only the FOB price. The oil price boom, say market analysts, would prompt oil companies to doctor their product mix to suit the home market, rather than draw up export plans.

The predictions seem far fetched, especially when crude prices are at a record high of $20a barrel. Soaring crude oil prices have dragged up selling rates for petroleum products. A 30 per cent hike in crude prices resulted in a 40 per cent jump in LPG prices by end June.

Since then crude oil prices have moved further up and are now roughly 50 per cent higher than in early March, when they broke through the $9 a barrel cordon to hit $11 a barrel. The North Sea Brent price of $20.29 a barrel is a clean $7 jump since OPEC members began their concerted production cuts in March. In the Gulf (where most of India's oil imports come from) crude prices kept close on the heels of the Benchmark North Sea Brent, ranging between $19.31 a barrel to $19.46 a barrel.

Soaring prices coincide with a gradually growing surplus of petroleum products at home. If all goes well, oil companies should have 3.5 million tonne of surplus motor spirit and diesel for the export market, just when world market prices are at their very best. Between the first week of July and August 10 high speed diesel (HSD) turned dearer by$16 a tonne in Southeast Asia. The FOB rates for HSD hit $159.06 a tonne in Singapore, from $143.36 a tonne on July 5.

Prices of naphtha (which is already in surplus at home) jumped from $186.87 a tonne in early July to $207.45 a tonne in the second week of August. Fuel oil prices hit $115.75 a tonne in Singapore, compared to $99.88 a tonne in early July. Incidentally, fuel oil and naphtha are among the free-priced petroleum products at home and hence, sensitive to world price movements.

Only bitumen and light diesel oil (LDO) prices have remained somewhat stagnant, oblivious to the turmoil in the oil market. That, say analysts, was because prices ultimately are determined by demand. The demand for petroleum products at home (growing at a gentle pace of 6 per cent) should be outpaced by supplies by the third quarter of this fiscal. The country should have close 100 million tonne of refined petroleum products by end September, compared to the current demand for 95 million tonne.

Oil companies should begetting their marketing act together for the world market and some of them are. Indianoil, for instance, entered into a agreement with a trading enterprise in Bangladesh for marketing lubricants. The flutter of activity is actually not so much, in the marketing divisions of oil companies, as at refining units. Industry watchers say oil refining and marketing companies will make quick changes in their product-mix to convert surpluses into products in short-supply, like kerosene.

The country imports close to four million tonne of kerosene a year and is expected to continue to do so, with demand outpacing supplies, despite the slow growth in consumption. Instead of producing two million tonne of extra diesel for the overseas market, the national oil companies are expected to convert it into kerosene and furnace oil.

Every 100 tonne of diesel can be broken up into 70 tonnes of kerosene and 30 tonnes of furnace oil. The conversion will not be prompted by patriotism or the social responsibilities of thepublic sector, but by market mechanisms and a simple formula now popular as ``import parity pricing.''

Import parity allows oil companies to price their products according to the landed cost of petroleum products. Naphtha, LSHS and furnace oil prices at home, therefore, reflect the CIF price of the imported product, plus port charges and customs duty. When exporting a product, oil companies are only entitled to the FOB price of the product. The FOB price of high sulphur furnace oil was $115.75 a tonne in the Asian market this week, which works out to Rs 4,977.25 a tonne, or Rs 5,798.49 a kilo litre. The import parity price that the national oil companies resorted to two weeks ago was Rs 6600 a kilo litre, which is nearly Rs 1,000 dearer than prices prevailing in active oil markets overseas.

The import-parity price advantage is expected to veer oil companies away from the export market and turn them into good corporate citizens, assiduously re-working refinery mechanisms to bridge short-supplies at home.Just as diesel can be broken up into kerosene (11 million tonne of which is subsidised from the oil pool account), motor spirit or petrol can be broken up into naphtha.

Think-tanks says changing product mixes was a part of the market mechanism anyway. Oil companies have already been through the drill once when 30 per cent of petroleum products were taken out of the purview of the administered pricing mechanism in April last year.

Oil companies began making more diesel, because the import-parity price was more remunerative than the semi-controlled price of kerosene at home. With oil prices at a never-before high around the world, exports turn out to be a better option than catering to the controlled market, but the free market at home is a superior alternative to even exports. Only time will tell, however, how oil companies grapple with the new market dynamics.