Oil price rout brings sigh of relief

WTI crude drops to $95-96 on hopes of early resolution of Russia-Ukraine conflict

KARACHI:

Pakistan’s economic managers heaved a sigh of relief as global crude oil prices returned to below $100 a barrel on hopes of early resolution of the conflict between Russia and Ukraine, as the two countries are likely to reach a middle ground during the ongoing talks.

West Texas Intermediate (WTI) crude oil dropped to $95-96 a barrel on Tuesday, after hitting a 14-year high of around $130 on March 7.

The crude oil at $95-96 is notably lower compared to $105 on February 28, the day on which Prime Minister Imran Khan slashed petrol and diesel prices by Rs10 per litre against expectations for an increase.

This means that the global oil prices have reduced to the level where the country may not be required to pay subsidy on petroleum products to maintain prices at current levels till the end of June 2022 - in line with the government announcement.

However, the estimated collection of tax revenue on petroleum products may remain low against the figure agreed with the International Monetary Fund (IMF).

Earlier, the government passed on a huge part of the increase in world oil prices to the local consumers as the country heavily relies on imported energy. “The global oil price has dropped significantly (compared to a 14-year high), but will remain volatile between $85 and $90 per barrel in the short to medium run,” AA Gold Commodities Director Adnan Agar underlined.

“The oil price above $80 a barrel, however, is still high (beyond the affordability) for economies like Pakistan,” he added. Kyiv and Moscow will soon move towards ending the war and announce a peace agreement. The world is also making efforts to get the conflict over. “This will keep oil prices between $85-90 per barrel,” he said.

However, Arif Habib Commodities CEO Ahsan Mehanti held the view that “the oil price may again rise to over $100 a barrel (soon), as it has corrected significantly from its recent highs”.

“The global crude oil has dropped on speculation of early resolution of the Russia-Ukraine conflict, while a prolonged conflict and a lot of time required to reach a peace agreement will push the oil price back to over $100 per barrel.” Even when there were no clouds of war, the oil price was set to head towards $100 a barrel during 2022, he said.

The higher oil price would keep Pakistan’s import bill inclined and keep the current account deficit stretched.

“The oil import bill alone is estimated to cost $20 billion during the current fiscal year (against nearly $10 billion in the previous fiscal year),” he said. A reduction of Rs5 per unit in power tariff was also part of the industrial relief package that was termed politically motivated to win people’s backing against the opposition’s no-confidence move against the PM.

The government is projected to pay Rs28 billion in subsidy on petroleum products in the first half of March 2022 to maintain their prices at current levels.

The government was estimated to pay Rs250-350 billion in subsidy under the latest industrial package announced for four months (March-June 2022).

The IMF, under the ongoing $6 billion loan to Islamabad, has expressed its surprise over the subsidy payment which was in contradiction with the loan agreement.

Agar said that the drop in global crude oil price has also apparently dismissed the chances of a likely upward revision in the benchmark interest rate at an emergency meeting by the State Bank of Pakistan (SBP).

The central bank kept the rate on hold at 9.75% earlier this month and said it was ready to meet anytime and revise the rate, if required, considering the then rising oil prices.

The domestic economy, however, would remain under pressure due to rising import bills and sluggish export earnings as the country’s foreign exchange reserves are depleting every passing week.

In this backdrop, the rupee hit a new all-time intra-day low over Rs180 against the US dollar in the interbank market on Tuesday.

The oil price may drop to Pakistan’s affordable level in the range of $70-80 per barrel only in case the Opec (Organisation of the Petroleum Exporting Countries) increases oil production which seems less likely over the next few months, he underlined.

Published in The Express Tribune, March 16^th, 2022.

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