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Volatility witnessed and to persists in coming week

The week ended on 22nd November 2019 can be termed a volatile one for Pakistan Stock Exchange (PSX). The benchmark index touched a low of 37,101 and a high of 38,564, but finally closed at 37,926 level. The market was driven by expectations surrounding monetary policy and current account position. Pakistan posted US$99 million current account surplus in October 2019. Expectations of rate cut dampened soon as the latest T-Bills auction witnessed a marginal uptick in yields. Average daily trading volume rose to 330.9 million shares, from 311.2 million shares in the earlier week. Top volume leaders included: BOP, KEL, PAEL, TRG and FCCL. Top performers included: GWLC, EFERT, HUBC, FFC, and PSO, while laggards were: CHCC, FFBL, FCEPL, PSMC and MLCF.

Amongst major sectors, a pullback was witnessed in Automobile and related sectors, followed by Power (up 3.1% on possible issuance of power Sukuk for resolution of circular debt after getting approval for increase in Government guarantee limit by the IMF) and Fertilizers. Inflows from Foreigners together with net buy of Individuals absorbed selling by Banks, Insurance and Others.

The total liquid foreign exchange reserves held by Pakistan were reported at US$15,462.3 million on 15th November 2019.The break-up was: foreign reserves held by the State Bank of Pakistan (SBP) were reported at US$8,442.1 million, whereas net foreign reserves held by commercial banks amounted US$7,020.2 million. During the week under review, reserves held by SBP increased by US$45 million to US$8,442.1 million.

In the recent monetary announcement, State Bank of Pakistan decided to maintain ‘Status Quo’, keeping the policy rate at 13.25% foreseeing inflationary pressures in the short term. Resultantly, investors’ focus could again shift on to the banking stocks, impetus could be provided by higher November 2019 inflation expectation. Slight sell-off could be witnessed in leveraged plays. From a market perspective, volatility could be witnessed in the upcoming week given upbeat investor sentiment and general phenomena of a roll-over weak acting together. Hence, any weakness should be taken as an opportunity to build positions.

Auction of 24 oil and gas exploration blocks in Pakistan has been delayed for more than six months because the Defence Ministry has not issued a security clearance. Auction of exploration blocks is subject to security clearance of the areas concerned by the Ministry. Testifying before the Senate Standing Committee on Petroleum, the Petroleum Secretary, Asad Hayauddin, said the petroleum division had requested the ministry to issue no-objection certificates (NOCs) for the 24 blocks some six months ago, but the clearance was still awaited. In June last year, then Petroleum Secretary, Sikandar Sultan Raja had also complained to the committee that his department had been waiting for clearance for 30 to 40 exploration blocks since long. It is believed that the Division had also proposed a time-bound process for issuance of NOCs so that fresh blocks could be offered at regular intervals to local and international companies for exploration, but in vain.

Director General Petroleum Concessions, Imran Ahmed told the Committee that the total oil and gas production in the country stood at 89,030 barrels per day (BOPD) and 3,935 million cubic feet per day (MMCFD) in 2018-19. The energy mix of the country comprised 34% natural gas, 31% oil, 13% coal, 9% liquefied petroleum gas and one percent liquefied petroleum gas. The total sedimentary area was said to be of about 827,268 square kilometers and the area under exploration was 224,976 square kilometers. Ahmed said that total number of fuel discoveries made in the country stood at 394 with 85 of oil and 309 of gas, the success rate being about 34%.

 

Domestic Furnace Oil (FO) prices are falling in-line with global trends as IMO 2020 imparts its magic, capping the allowed limit of sulfur in shipping fuels to 0.5% against previous limit of 3.5%, resulting in an expected decline in global demand to 1.55 million bpd against 2.86 million bpd for CY19.

This decline is causing a shift in power generation preferences where FO based power generation now stands cheaper than the grid while closely competing with natural gas. We opine, a continued decline in FO prices can allow power generation on FO to be cheaper than natural gas.

For cement manufacturers, Punjab-based players can turn out to be significant beneficiaries in the current scenario, where increasing RLNG prices forced them to prefer the grid. Analysts forecast DGKC to save Rs8.00/bag on production at Kalar Kahar, while MLCF and FCCL are expected to save Rs3.00/bag.

Among other potential beneficiaries are LUCK’s Pezu plant and DGKC’s plant located in South zone with the former expected to face gas shortages in winter while for latter, decreasing FO prices can result in FO based power generation being cheaper than KE tariff.

In this backdrop, analysts believe players like LUCK, MLCF and DGKC will continue to enjoy an advantage over others after already selling well above their capacity based shares in 1QFY20, capitalizing on low cost of production in an environment of price competition. Any further decline in FO prices can provide additional impetus to these players.

October 2019 rounds out the culmination of a watershed mark for international refining margins, with MS/HSD/HSFO crack to Arab Light for the month averaging US$+3.90/+11.39/-18.82/bbl below as compared to 1QFY20 averages +3.2/+11.5/-6.5/bbl. HSFO shows a clear break downward as IMO 2020 rules and slowing demand from marine bunkering worsen cracks.

Crude prices have been moving in a narrow band, while recovering sharply from any supply shocks as excess capacity in OPEC markets, heightened trade tensions and soft demand from emerging markets keep oil markets slightly over supplied.

Monitoring the impact of IMO 2020 through HSFO 180 CST commodity futures contracts, analysts highlight the significant downtrend indicated by lower HSFO futures prices for delivery contracts during 1QFY20 (lower by US$101.3/ton on average) extending to CY20, indicating a period of extended decline in soon to be phased out, high Sulphur variant of FO still used for power generation domestically.

While refiners remain on the firing block (downtrend in GRMs for FO), based on its slow and steady operational performance, analysts believe a few can capitalize on a possible revival in private sector (captive power) and IPP bulk sales.

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