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Rising commodity prices a treat for Pakistan economy

It is no secret that bulk of Pakistan’s import consists of energy and food products. Lately, the government has allowed export of half a million tons wheat and millers are expected to produce half a million tons refined sugar. It is therefore, imperative that the business community and the policy makers keep a close eye on movement of prices of energy and food products.

In January 2019, global commodity prices broke the downward trend observed in the previous two months, rose by half a percent following a fall of 1.6 percent in December 2018. The rebound in global commodity prices reflected a sharp increase in crude oil prices after OPEC led by Saudi Arabia, Russia and other producers, agreed to cut production. An uncertain global economic outlook and the ‘pause’ by the US Federal Reserve propelled precious metal prices, while solid demand supported prices for agricultural products. Global commodity prices are likely to remain on upward trajectory.

Energy prices were up 2.3% month-on-month, contrasting December’s 12.2% decrease. Energy prices benefited from a strong increase in both WTI and Brent crude oil prices as the OPEC oil cut deal gradually tightened global oil markets. Reportedly, OPEC members have already delivered almost three quarters of its target to reduce production by 800,000 (bpd) from October’s level, although Russia is currently lagging behind its OPEC allies. US sanctions against Venezuela’s oil sector also pushed up prices, especially in the United States. As a result of the recovery in oil prices, prices for oil-derivatives also gained ground in January. Conversely, cooling growth in China led the decline in both thermal and coking coal prices. Natural gas prices also fell in January due to mild weather so far this winter and despite inventories remaining significantly below the five-year average.

Brent crude oil prices continued to climb in February on OPEC+ supply cuts. On 8th February, oil was traded at US$61.4 per barrel, which was up 7.8% from the same day last month. Although the benchmark price for global crude oil markets was down 4.5% from the same day last year, it was 21.4% higher on a year-to-date basis. Oil prices continued to climb in recent weeks amid signs that the oil cap deal signed by OPEC and Russia is gradually tightening global oil output. Reportedly, OPEC’s combined oil production declined by around 890,000 barrels per day in January from December, which represented the largest monthly drop since January 2017. Along with some OPEC members displaying a strong commitment to the production cuts, the reduction also reflected supply disruptions in Libya, sanctions restraining Iran’s oil exports and the dire state of Venezuela’s oil industry.

Russia, however, is lagging behind its OPEC allies and reduced output only marginally in January. This was countered by Russian officials, who stated that this was due to technical limitations and that its adjustment would be more gradual.

 

Natural gas prices have fallen over the past month despite a short-lived harsh cold snap which saw US demand briefly spike, rising to a near record-high in the residential and commercial sectors. On 8th February, the Henry Hub Natural Gas price was US$2.58 per one million British thermal units (MMBtu). The price was 12.9% lower than on the same day in the previous month and was down 12.1% on a year-to-date basis. In addition, the price was 4.2% lower than on the corresponding day in 2018. Prices have been extremely volatile in recent weeks. In early January, prices surged on forecasts of cold temperatures sweeping the US, with investors wagering that this would cause natural gas demand for heating purposes to surge. However, prices have declined sharply since the middle of January despite the extreme cold weather, driven by projections of an abrupt end to the cold spell and warmer temperatures going forward, which is expected to dampen natural gas demand. As a result, by early February natural gas prices had more than erased the gains made in the first half of January, and had fallen to the lowest level in almost one year.

Wheat prices have remained more or less stable in recent weeks, likely in part due to the US government shutdown. This caused a lapse of key reports from the United States Department of Agriculture (USDA), depriving the market of important information. On 8th February, wheat was traded at US$ 551 cents per bushel, which was 0.4% higher than on the same day in the previous month. Moreover, the price was up 2.8% on a year-to-date basis and was 18.6% higher than on the same day last year. Looking ahead, prices are forecast to moderate from their current level this year amid higher US production. On a global level, production is set to decline in the 2018–19 season on lower output in Australia, the EU and Russia. At the same time, global demand is set to increase only slightly, with greater food usage partly offset by lower feed usage.

Sugar prices were largely stable through January and early February, as higher output from India was broadly offset by rising oil prices. Sugar traded at US$12.8 cents per pound on 8th February. The price was down 0.9% from the same day last month. It was 2.6% higher on a year-to-date basis, but was down 6.3% from the same day last year.

Cotton prices rallied somewhat in early February. On 8th February, the spot price was US$68.0 cents per pound, which was down 0.5% from the same day last month but was 0.3% higher on a year-to-date basis. Moreover, the price was down 8.4% from the same day last year. Trading was limited due to the US government shutdown.

Subsequently, production forecasts for the US and Brazil were raised, while supply forecasts from other countries were lowered. Demand expectations also fell due to economic slowdowns in China and Turkey.

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