Falling Oil Prices: Blessing in disguise for Pakistan

November 2 ,2020 (MLN): Crude Oil price has fallen by 37 percent on Monday to trade around 34.46 dollar per barrel.

In a week, US Crude oil price tumbled by 14.5 percent, on growing concerns that the rise in COVID-19 cases in Europe and the United States could hit fuel consumption. While upcoming U.S. presidential elections led to accelerated caution.

British Crude Oil price went down by 3.2% to $36.7 per barrel, while in a week, it plunged by 14.5%.

The fall in oil prices is a blessing in disguise for Pakistan given the fact that the country is net energy importer. Thus, every 10% plunge in oil price improves external account position by USD1 billion per annum, thereby any short-term decline in oil price may further support Current account surplus for a while, a report by Sherman Securities stated.

In addition to this, the decline in crude oil prices will also help in reducing inflationary pressure. As per the report, oil directly contribute around 4% in CPI (which can be passed through to consumers immediately) besides having indirect contribution as well. Thus, other things remaining the same, recent oil price if passed on to consumers may restrict CPI to 8-9% in upcoming months.

As far as heavy weight E&Ps are concerned, the report cited that every 10% reduction in oil price drag earnings of local hydro-carbon explorers by 5%. But, given the fact that the sector is already trading at steep discount to earnings, thus investors are not incorporating oil earnings fully. However, the tumbling oil prices bodes well for their liquidity and improve dividends since lower oil price scenario reduces circular debt pile up.

On the other hand, with regards to refineries and OMCs, the report highlights that any volatility in oil prices might affect then as they may have to face inventory losses, however, small OMCs (Hascol) may face major brunt (as seen in past). On the other hand, PSO may also get affected by inventory losses but lower price is better for the liquidity of the company, thus improving payouts going forward.

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