January 4, 2022 (MLN): Over the last 12 months, petroleum products have contributed on an average 22% to the total monthly imports. The rising crude oil prices have put policymakers in a pickle, exposing them to external imbalances i.e., trade as well as current account.

The government has taken some steps i.e., signing commodity financing agreements with Saudi Arabia and another $761.5 million agreement with the Islamic Trade Finance Corporation. Through these agreements, the government aims to support the foreign exchange reserves. On the other hand, the government is betting on oil prices to decline in the international markets but forecasts from the World Bank, International Monetary Fund, Seeking Alpha, and Energy Information Administration all predict oil prices to sustain at their current levels.

So far, Pakistan has imported crude oil at roughly $72 per barrel since July 2021. With the average forecast for 2022 down by ~5%, the petroleum imports bill is likely to remain elevated. The only respite government can find is through a reduction in petroleum consumption as buyers are likely to reduce consumption of fuel products in view of the high per litre prices.

These forecasts are not linear and remain subject to key risks.

Firstly, the resurgence of Covid-19 through the Omicron variant could potentially force a global shutdown. This in turn will slash the oil demand thereby decreasing the commodity prices. In Pakistan, an increase in cases could have an impact on the demand, decreasing the quantum of crude and petroleum imports in the country.

Secondly, the OPEC+ is set to meet in January next year when it will decide on production increases. Even though it seems highly unlikely that the OPEC+ countries will increase production during the current high price environment, the meeting remains a key upside/downside risk to benchmark crude oil prices.

Finally, countries outside the oil-rich Gulf region are seeing significantly low capital investments in oil exploration and production amid climate concerns. However, historically, shale oil production has quickly ramped up in response to high oil prices. Climate discourse could be a downside risk to shale oil production.

Meanwhile, in the case of Pakistan, if crude prices fail to decline substantially from their current levels, pressures in the form of inflation will continue to remain throughout 2022 as the government already has made a commitment to increase per litre prices by Rs4 with the International Monetary Fund in order to meet the budgetary revenue target through the Petroleum Development Levy.

Although the direct impact of fuel product prices on inflation will likely begin to manifest immediately, the second-round impact in the form of increased fares will also begin to seep into prices of other commodities with the lagged effect. This in turn will keep the inflation readings elevated throughout the next calendar year.

Beyond fuel prices, prices of palm and soybean oil are also expected to remain high in 2022 as per the forecasts shared by organizations.

The crude oil price forecasts put Pakistan’s external accounts at risk and will likely deplete the country’s forex reserves.

Copyright Mettis Link News

29950