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OPEC oil supply cut may affect Pakistan’s economy

The OPEC-led group of oil producers announced a supply cut of 1.2 million barrels per day (bpd) in crude oil supply from January 2019, measured against October 2018 output levels. The move follows a more than 30 percent collapse in oil prices that saw international benchmark Brent crude fall from more than $86 a barrel to a 13-month low of $57.50 last month. The oil market is heading for another streak of volatile trading, in part due to competing priorities by the world’s top three producers. While some analysts believe international oil prices will average $60 a barrel in 2019, others forecast the production cuts will cause Brent to rebound back toward $70 or $80 a barrel.

Oil prices are expected to settle in the mid-term range of $45-$60 a barrel amid the financial market slump and an emerging oil supply overhang. The US wants the crude oil prices to keep falling from $50 level, while Saudi Arabia prefers Brent crude at $70 to $80 a barrel and Russia is content with $60 oil. The global demand for oil is expected to grow at 1.31 million bpd in 2019. However, the world’s appetite for oil might only grow by a little more than 1 million bpd if the United States and China escalate their ongoing trade dispute. A trade deal could lead to 1.56 million bpd in growth.

Impact on Pakistan

The implication on Pakistan economy following recent OPEC decision remains dependent on the extent of oil price move, the optimal scenario for Pakistan economy remains measured increase in oil price, which the government would attempt to pass-on to the consumers sooner rather than later. That said, in worst case of protracted surge in oil prices, there is possibility of negative implications on macroeconomic stability. According to financial analysts, A $5 increase for the year would increase import bill by $1 billion. On the macro front, the first round of impact will be on inflation and the concerns on external account and currency may aggravate further. While on one hand, OPEC decision and rising oil prices may positively affect the E&P, banking, OMC, IPP and textile sector, on the other hand, it may prove negative for refineries, chemical and cement sector.

 

Rising oil prices will add to pressure on the country’s forex reserves, widen trade gap as we spend more on the energy import bill, push domestic power prices, increase the already high cost of doing business affecting export competitiveness, expand budget deficit, spike inflation and squeeze household incomes. Perhaps the only thing that could come to government’s rescue is US supply growth and deferment of oil payment bill to the tune of $3 billion by Saudi Arabia.

Looming oil crisis

Below capacity operation of oil refineries and depriving the provinces from oil exploration activities is further aggravating the situation. Closure of furnace oil-based plants is impacting jet fuels. Refineries together are responsible for 30 percent of the furnace oil supplies or around 300,000 tonnes per month while Pakistan State Oil (PSO) is responsible for around 66 percent of the total furnace oil supplies, with other importers cater for the remainder. The permanent solution lies with understanding of the problem by all concerned stakeholders who should be onboard for creation of a proper forum for planning of energy supplies to the power sector.

The petroleum policy formulated in 2012 is also due for review. The provinces are demanding revival of offering new exploration blocks as they believe non-exploitation could have longstanding repercussions. Presently, the government could entrust upstream development work anywhere in the country to the petroleum ministry. The upstream petroleum sector includes exploration and production of oil and natural gas and held key to self-sufficiency in the sector, decrease imports and pave way for massive economic development. Because of massive contracts for exploration blocks, the upstream sector is also the most lucrative. Provinces claim that the present situation is stagnating investments and should be reviewed so that their concerns could be addressed.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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