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Rising fuel prices may hit Pakistan’s consumer

Almost two years earlier Brent crude oil prices were at low $27.88 a barrel in January 2016 and 11 months down the lane prices are hovering around $55 and throughout 2017 prices of Brent crude oil spot prices is at a current level of 64.61 up from 53.93 one year ago. Since the start of the year, Brent and WTI have risen by 17 and 12 percent, respectively, although the price rises from mid-2017 are much stronger, at nearly 50 percent. On the supply side, Brent prices have been supported by a year of production cuts led by the Organization of the Petroleum Exporting Countries (OPEC) and Russia. The cuts started last January and are scheduled to cover all of 2018. But the questions are if these fuel rising benefit the consumers or burden them more. Rising fuel prices will pinch consumers’ pockets. Higher oil prices are likely to cause some grief to consumers and companies that use it as an input, but should bring benefits to its producers. Recent announcements by Russia and Saudi Arabia have helped oil prices to recover and several analysts have highlighted the energy sector as a potential play for investors. The price for the commodity has been as volatile as ever, but there has seen some strong gains.

It was in late 2014 that the Organization of the Petroleum Exporting Countries (OPEC) shifted its production strategy to defend market share rather than price. Oil producers have been producing more than demand. At the beginning of 2016 too, OPEC and non-OPEC producers kept producing at high levels amid tepid global demand. The main turning point came at end-when OPEC decided to cut oil production, the first reduction since 2008, taking the markets by surprise. More details emerged in a November meeting, when OPEC decided production levels for member-nations. Non-OPEC producers also agreed to cut output. These initiatives have given a new lease of life to crude prices and are expected to bring demand-supply balance in global crude oil markets. Three major producers (Iran, Libya and Nigeria) in OPEC with reasonable spare capacity have been kept out of the new production limits, analysts from Kotak Institutional Equities noted in a report in December 2017.

US shale oil production could rise sharply on the back of higher crude oil prices. Kotak has forecast the global crude oil price at $50 a barrel for fiscal year 2017 and $55 a barrel for fiscal year 2018. Higher oil prices affected Indian companies. The earnings of Indian upstream oil companies raised oil prices. Earnings per share of these companies increase as oil prices rise.

Strengthening crude prices is one factor that has helped these stocks outperform the benchmark Sensex in recent months. In keeping with the expectations of firmer oil prices, price realizations for Oil and Natural Gas Corporation Ltd (ONGC), Oil India Ltd and Cairn India Ltd are expected to improve in financial year 2018. Also, realizations of Gail (India) Ltd’s liquefied petroleum gas (LPG) and petrochemicals business benefit from higher crude prices. So far in 2016, ONGC, OIL, Cairn India and Gail stocks have increased about 20 percent, 15.4 percent, 76 percent, and 15 percent respectively. For the state-run oil marketing companies Bharat Petroleum Corp Ltd (BPCL), Hindustan Petroleum Corp Ltd (HPCL) and Indian Oil Corp Ltd (IOC) higher crude prices lead to an increase in the “fuel and loss” component, say analysts.

Fuel and loss refers to the cost that refiners incur due to the fuel consumed to run their plants and the fuel lost in the system while processing crude oil into petroleum products. Moreover, working capital requirements may also increase. Currently these stocks trade in the range of 9-11 times estimated earnings for this financial year.

Lubricant makers Castrol India Ltd and Gulf Oil Lubricants India Ltd is expected to be adversely affected. Their key raw material base oil is a crude oil derivative. Higher crude prices will lead to higher base oil prices.

Oil prices have struggled in recent years due to a global oversupply, but OPEC and non-OPEC producers have reduced their output in hopes of rebalancing the market, agreeing to cut production by 1.8 million barrels per day. While increased US oil and shale gas production have undermined the output cut, it at least seems to have helped stabilize the price of oil. The price for Brent crude has averaged $54 per barrel, according to UBS strategist Geoff Dennis. The output cut was only meant to last six months, but major oil producers Russia and Saudi Arabia announced that at the supply cut should be extended for another nine months, into March 2018.

 

Impact on Pakistan’s economy

Inflation in Pakistan has shown increase during October due to surge in oil prices as it recorded at 3.8 percent during last month over a year ago. The inflation measured through Consumer Price Index (CPI) has recorded at 3.8 percent during October against same month of the last year, according to the latest data of Pakistan Bureau of Statistics (PBS) released. The inflation has recorded increase due to continuous hike in petroleum products prices.

The inflation is likely to fuel in the month to come, as the government once again has increased oil prices for November. The government has increased the price of petrol by Rs2.49 per litre. Meanwhile, high speed diesel price was enhanced by Rs5.19 per litre, light diesel oil by Rs3 per litre and kerosene oil price increased by Rs5.19 per litre for November.

According to PBS, the CPI based inflation has recorded at 3.5 percent during first four months (July-October) of the current fiscal year. The Sensitive Price Indicator (SPI), which gauges rates of kitchen items on weekly basis, has increased by 0.89 percent. Similarly, the wholesale price index (WPI) based inflation enhanced by 1.39 percent in the period under review. The break-up of inflation of 3.8 percent showed that food and non-alcoholic beverages prices have increased by 3.24 percent.

Similarly, health and education charges went up by 10.57 percent and 11.46 percent, respectively. Prices of utilities (housing, water, electricity, gas and fuel) increased by 4.88 percent in last month. In food commodities, prices of tomatoes increased by 31.43 percent, betel leaves and nuts by 2.57 percent, potatoes 2.25 percent, eggs 2.04 percent, onion 1.9 percent and gram whole prices surged by 1.59 percent. Meanwhile, in non-food commodities, prices of kerosene oil enhanced by 3.9 percent, education charges by 3.7 percent, motor fuel 1.91 percent and house rent went up by 1.34 percent during October as against September.

Petroleum products prices are likely to continue their upward revision in the coming months in line with global market of crude oil which is being forecasted to go up by $55 to $60 per barrel in next year by World Bank. The oil prices are hovering around $49 to $52 per barrel currently in the international crude oil market. Accordingly, the prices of petroleum products are expected to go up by Rs 5 to 10 per liter on various petroleum products till 2018 in Pakistan. It will also impact on overall import bill of the country as the volume of oil products’ imports continue to surge due to high consumption and demand in transportation at local level.

Rising oil prices, supported by production cutbacks by Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC states, will allow markets to gradually rebalance, the report of the World Bank in its April Commodity Markets Outlook said. However, these oil price forecasts are subject to downside risks should the rebound in the US shale oil industry be greater than expected.

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