Insight: Indonesia’s oil purchasing power under strain from currency dip

Indonesia's Pertamina continues to see its purchasing power in the international oil markets deteriorate as its domestic currency, the rupiah, extends sharp losses against the US dollar, a trend that is forcing the state-run energy firm to buy cheaper gasoline grades and cut crude imports.

The US dollar/rupiah exchange rate surged above Rupiah 14,700 this week, the highest level since September 29, 2015, and up by more than 8% from Rupiah 13,542 at the start of the year.

The rupiah's sharp weakness against the US dollar has significantly increased Pertamina's crude and fuel procurement cost burden so far this year, making a case for the company to focus more on importing lower octane gasoline grades, primarily 88 RON, rather than the higher octane 92 RON and 95 RON gasoline specifications.

Pertamina plans to import around 11 million barrels of gasoline in September, trade sources with knowledge of the matter said.

Market watchers were unable to provide a breakdown of volumes between the three 88 RON, 92 RON and 95 RON gasoline grades for the September imports, but recent spot market activity from Pertamina was focused on the economical 88 RON grade.

Pertamina in July issued several tenders to buy up to 1.47 million barrels of 88 RON gasoline for September delivery, with another 300,000 barrels awarded in August for prompt delivery over the third decade of August.

Pertamina, meanwhile, canceled tenders for September delivery of 92 RON gasoline and condensate, as it considered offers submitted into the tender as too high, trade sources close to the company said.

Pertamina has a steady track record of purchasing 88 RON gasoline at a discount to the regional fuel price benchmark. For July 3-5 delivery, Pertamina had previously awarded a buy tender for 88 RON gasoline at a discount of $1.80-$2.10/b to the Mean of Platts Singapore 92 RON gasoline assessments. For September 5-12 delivery of 88 RON gasoline, the company awarded its buy tender at a discount of 80 cents-$1/b to MOPS 92 RON gasoline assessments.

Domestic crude

Indonesia could also step up efforts to curb dollar outflows by digesting more domestic crude oil going forward.

Although Indonesia remains one of the biggest oil producers in Southeast Asia, weak domestic currency and rising dollar-denominated international crude prices don't bode well for the economy's balance sheet as it is also the biggest energy consumer in the region, turning to a net crude importer in 2012.

Front-month ICE Brent crude futures have rallied from $66.55/b at the start of the year to surpass the $80/b mark in May, rising more than 20%. The international crude benchmark has been consolidating in a $72-$76/b range in recent weeks and holding above the 100-day exponential moving average line on a 24-hourly candlestick chart seen by S&P Global Platts, signaling that the medium- to long-term uptrend remains intact.

Southeast Asia's biggest energy consumer has been actively retrieving various domestic field operatorships from foreign upstream companies this year, signaling Jakarta's desire to make the most of local oil and minimize crude import bills.

The availability of Indonesian light sweet crude and condensates has been declining sharply after Pertamina took full control of the Mahakam production block early this year. Among Indonesia's key export grades, Senipah condensate, Bontang condensate, Handil Mix and Attaka crude could mostly dissipate from the Asian spot market as the majority of the output would be processed by Pertamina's domestic refineries, industry and market sources have said.

Exports of Indonesia's heavy sweet Cinta and Widuri crudes could also cease from September with the end of operator CNOOC's production-sharing contract in southeast Sumatra. Following the expiry of CNOOC's PSC, the management of the blocks is expected to be handed over to Pertamina.

"Pertamina will evaluate carefully whether the crude is suitable with our refineries. If it is suitable...we will prioritize our consumption first rather than export," Pertamina's communications vice president Adiatma Sardjito told S&P Global Platts.

Furthermore, the Jakarta Post reported last week that the energy and mines ministry has requested all upstream contractors in the country to sell their equity barrels to Pertamina instead of exporting to overseas buyers in an effort to slash the country's crude import bill.

"Indonesia's crude import requirements have grown on the back of new refinery capacity, and domestic production declines. Reducing exports will mean more of Indonesia's crude is used domestically," Wood Mackenzie research director Andrew Harwood said.

Rupiah downside

Despite Bank Indonesia's efforts to shore up the rupiah by hiking the policy interest rate by 125 basis points since May, the domestic currency has continued to weaken sharply against the US dollar due largely to the widening trade deficit, growing infrastructure-related raw material imports and lower-than-expected first-quarter GDP growth.

The rupiah, a high beta emerging market currency that is extremely sensitive to global economic growth risks, has also been weighed down by recent jitters surrounding the US-China trade war as well as the sharp decline in the Turkish lira.

On August 15, Bank Indonesia raised the seven-day treasury reverse repurchase rate by 25 basis points, but the Indonesian currency is likely to remain bearish against the dollar as the central bank may struggle to find a rationale for additional hikes in the benchmark interest rate due to tepid consumer spending and inflation.

On the contrary, the US Federal Reserve is widely expected to conduct two more rate hikes in H2 amid improving employment data.

Central bank rate hikes typically contribute heavily to the strengthening of domestic currency as the monetary tightening measure often leads to an increase in foreign fund inflows, with many offshore investors seeking to take advantage of higher local interest rates and government treasury bond yields.

Apart from Bank Indonesia's aggressive policy rate hikes, the central bank was recently suspected of intervening in both the domestic currency market and non-deliverable forwards during New York trading hours to prop up the rupiah, and trim cost burdens for local companies that rely heavily on goods and materials imported from overseas.

Forex intervention is an emergency money market operation that involves a central bank offloading some of the country's foreign currency reserves and buying up local currency for its support. However, central bank intervention is typically a short-term solution, and more constructive ways to support the local currency includes narrowing the current account deficit, currency traders based in Singapore said.