Pakistan decides to draw up oil hedging plan

Finance Division working on hedging options to take advantage of low crude prices

ISLAMABAD: As a tug of war between Saudi Arabia and Russia over oil production, coupled with the rapid spread of coronavirus, has sent crude prices crashing to a 17-year low in the global market, Pakistan has decided to come up with an oil hedging plan.

Experts are of the view that crude oil prices in the international market will crumble to $15 per barrel as big producers and exporters Saudi Arabia and Russia seem to be nowhere near ending their price war.

The battle between the two giants has added to the woes of oil market where demand has gone down sharply in the wake of coronavirus outbreak that has caused lockdowns in many countries.

Sources told The Express Tribune that the cabinet, in a recent meeting chaired by Prime Minister Imran Khan, directed the Finance Division to expeditiously finalise a proposal for hedging petroleum products and bring it to the cabinet, through the Economic Coordination Committee (ECC), for formal approval.

Adviser to Prime Minister on Finance and Revenue Dr Abdul Hafeez Shaikh told the cabinet meeting that prices of petroleum products had plummeted in the international market following the collapse of an agreement between Saudi Arabia and other oil producers, led by Russia, on limiting crude production.

He said the Finance Division was working on various hedging options to take advantage of the current low oil prices, which would slash the import bill and leave a positive impact on the national economy.

Cabinet members emphasised that the hedging proposal should be finalised at the earliest and presented to the cabinet for approval.

Crude prices hit a 17-year low below $26 per barrel on Wednesday amid fears that the coronavirus pandemic and containment measures could trigger a global recession.

A debate has kicked off in the global market as to where the oil price slump will stop. Experts believe several companies will be washed away and industries will be hit hard by the virus, resulting in low demand for energy across the world.

Oil experts in Pakistan were of the view that the government should draw up a plan to fill the available storages by importing petroleum products for future needs.

They also suggested that Pakistan could explore the possibility of renting storages in different countries to keep cheaper petroleum products there for meeting its future needs.

They said though it was the worst time for the oil-producing countries, it provided an ideal opportunity for the importers to store the commodity. Even the US is planning to import cheaper petroleum products and store them as strategic reserves.

However, both the petroleum-sector regulator and the Petroleum Division have failed to help build storages in the country. In 2015, Pakistan faced a petrol crisis, which could have been averted had there been enough storages.

Neighbouring India plans to take advantage of low oil prices by filling its strategic petroleum reserves. It has a relevant company named Indian Strategic Petroleum Reserves Limited, which works on building the strategic reserves.

It has built storages at three locations in southern India to store up to 36.87 million barrels or about 5 million tonnes to hedge against supply disruption.

Consumers in Pakistan have been paying petroleum development levy (PDL) for several years. The levy was supposed to be spent on developing the petroleum sector including the establishment of storages.

However, previous governments tactfully changed its name as petroleum levy and never used it for setting up storages. Experts say the current government should immediately take a decision in this regard.

They emphasise that Pakistan has got an opportunity now to establish a separate account to keep funds for spending on building oil storages in the country. These strategic reserves can be used in emergency situations and Pakistan should follow the example of countries like the US and India.

Published in The Express Tribune, March 20^th, 2020.

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