ISLAMABAD – Shifts in oil prices remain ever important for Pakistanconsidering how a major chunk of its import bill comes from petroleum.Dampened economic sentiment has led to a decrease in oil consumption. Thisstrongly impacts Pakistan’s future outlook in terms of productive capacityand output.
Considering how the nation is on its path to recovery, increased demand forpetroleum is to be expected. However, given the expected rise in prices,this will weigh heavily on the import bill and deficits. That being said,Pakistan is a price taker in terms of crude oil. While it will be favorablefor Pakistan that global oil prices lay low, the situation at hand suggestsotherwise. Currently going through a heightened period of inflation, an oilshock is the last thing Pakistan needs.
Oil closed near its highest since September on Tuesday as investors movedtheir focus towards the ongoing US- China trade war ahead of the loomingtariff deadline. Oil prices fell on Wednesday after industry data showed anunexpected build in crude inventory in the US. Analysts expected a fall of2.8 million barrels but instead, inventories were high by 1.4 millionbarrels to 447 million.
However, the market still shows signs of strength as the market ralliestowards the $60 level. This is significant because the market has beenbouncing between $50 and $60.
Brent futures climbed up by 0.7% to $64.63 per barrel, the highest sinceSeptember 16th. This leaves the $65 level highly important. If the marketbreaks above, then it is likely that the market will then move towards the$67.50 level. The market anticipated strong draws in the inventory howeverthere was a build.
If we talk long term, the OPEC+ deal could push oil prices back to $70 perbarrel next year, if everything goes as per plan. Raising production cutsto 1.7 million barrels per day had caused the markets to respond, however,the unilateral over-compliance by Saudi Arabia agreeing to an additionalcut of 400,000 barrel per day left the market surprised.
Once the deal was announced, oil prices jumped. Saudi Arabia hopes to placepressure on all member countries to act in accordance with their allottedreductions. Additional cuts are summarized in the table below, with smallercontributions from the rest of the group. Saudi Arabia agreed to cutfurther than the voluntary 400,000 bpd.*Country* *Additional Cuts (Bpd)*Saudi Arabia 167,000UAE 60,000Kuwait 55,000Iraq 50,000Russia 70,000
The initial reaction from the market was positive if we consider pricing.However, there is skepticism regarding whether all producers would complywith the cuts, with Iraq being a prime concern. Saudi Arabia has put itscredibility at stake in regards to this deal. It will either be able to getall countries to comply or will likely flood the market upon expiry of thedeal in March.
If compliance is achieved, OPEC+ might be able to reap some degree ofsuccess considering the chances of pick up in global inventory restocking,and a relatively small US-China trade deal. This could push Brent above the$70 price target earlier than expected.
For Saudi Arabia, this means its budget deficit will balloon to US$50billion next year as low oil prices and reduced production eat into theKingdom’s oil revenue. The 2020 budget deficit would be 6.5% of its GDP, upfrom 4.7% in 2019. Saudi Arabia is banking on the hope that these extraproduction cuts will help lift the price of oil that will make up for thelower production, despite not working for 2019.
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However, one quick look at the deal shows that the actual production levelsfrom OPEC+ are not vastly different from the announced numbers. Thereby, itis expected that most participants will abide by their new commitments andmake adjustments in their economic forecasts.
However, this will have little impact on price considering how theagreement is geared more towards redistribution rather than altering actualabsolute production.
The deal, however, gives life to the US shale industry. The industry hasnot been able to produce returns. Positive cash flow from individualcompanies will most likely be used for debt reduction or shareholderpayouts instead of ratcheting up drilling. The sector has witnessed anincrease in the cost of capital amidst the wariness of investors. However,if oil prices rise above $60 per barrel, the returns for the industry couldimprove. This would give them the ability to return to drilling.
If we talk about the trade war, if tariffs go ahead, global demand outlookcould be held back. However, if a deal is struck, prices could breakthrough the resistance. The prolonged trade war continues to hang over themarket. Chinese exports to the US fell by 23% YoY last month, which is themost since February. The US also reported that no US crude oil was exportedto China in October for the first time in 9 months.
Another important development regarding oil is Israel’s pitch to India lastweekend. Israel floated the idea of a new transportation corridor in theMiddle East that will bypass the most critical oil checkpoint in the world,the Strait of Hormuz. This comes at a time when India has been takingactive steps to ensure the uninterrupted supply of energy by deploying itssailors and warships in the strait. This situation has been birthed as aresult of the attack on oil tankers due to the tensions between Iran andthe US.
The alternative corridor will connect the Mediterranean and the gulfthrough rail and sea. Israel will be used as a land bridge, whereas Jordanwill be a regional transportation hub. The plan is expected to becomeprofitable within a decade and include countries like UAE, Saudi Arabia,Jordan and Iraq through a potential trade flow of $250 billion by 2030.This will also bypass the threats from Iran and the Strait. If this managesto break through, oil volatility in the future is likely to be kept incheck. However, the impact on Pakistan remains a question.
It can be concluded that there is a wide range of dynamics stimulating thiscommodity. Taking all factors into account there is a likelihood for oilprices to head upward. This has the possibility to slow down Pakistan’space toward recovery.About the Author
Ariba Shahid is an Economy and Math Major from IBA.Tweets as @aribbae_ link_
