Karachi, July 25, 2022 (PPI-OT): Pakistan Oil and Gas: Oil prices easing off; a much-needed breather to Pakistan’s economy

Crude oil prices have traded down from recent highs, with a global hawkish stance, strong dollar and expectations of increasing supply from Saudi Arabia pressuring prices. Arab Light crude oil is down by ~16% from its recent high of US$134.44/bbl – reached in Mar’22.

In a response to inflationary pressures, the developing world is undergoing monetary tightening in hopes to curb demand. Canada has increased interest rates by 100bps, while ECB has increased the rates by 50bps. Furthermore, the US Fed is expected to further increase the interest rates in its upcoming meeting, in addition to the recent hike of 75bps. Resultantly, US$ has gained strength, with the US Dollar Spot Index trading up by 8.53% since Mar’22. The US$ historically has a negative correlation with crude oil prices.

Gasoline inventories build of ~3.5mn bbls was witnessed in the US, indicating that supply for the refined product has outpaced demand, worsening fears of an economic slowdown in the making.

Production addition from OPEC+ is on the cards, with the OPEC+ production requirement calling for 43.59mn bpd of production from the group in Aug’22, compared to 42.56mn bpd in Jun’22.

A threat to lower crude oil prices looms in the form of the Natural Gas supply disruptions in Europe, with Russia using the Nord Stream 1 pipeline as leverage against the region in face of sanctions placed on Russia.

Easing off prices would benefit Pakistan, with a likely slowdown in inflation and current account pressures. On the flipside, it would be disadvantageous to the E and P and OMC Sectors as earnings could potentially be affected by the same.