March 9, 2020 (MLN): Oil plunged by more than 30 percent on Monday after top exporter Saudi Arabia made deep price cuts following a failure by OPEC and its allies to strike a deal to support energy markets.
As soon as the impact of this debacle materialized, the Pakistani stock markets, along with the global markets, slumped by massive, substantial margins as Oil Companies across the board were made to suffer the brunt.
Amidst many spectators assessing and reporting the negative externalities of Saudi Arabia’s move, a report by Topline Securities has attempted to curb the situation by putting forth the positive outcomes of this price war.
The report has suggested that a slash in oil prices will be net positive for Pakistan’s macros, as nearly 26% of the overall imports in the country are driven by oil prices. Even though the exports and remittances are expected to fall by USD 1-2 billion, the net impact on the external current account is likely to show improvement.
The report has also linked the fall in prices with an increase in Pakistan’s ability to ‘sail through at least the next couple of IMF reviews’. It is believed that the impact of lower prices shall not be passed on to consumers on account of an increase in Petroleum Development Levy.
The circular debt of the country is also expected to come down as Government would not be leaving any stone unturned in pocketing part of lower oil prices in electricity tariffs under Monthly Fuels Adjustments.
The highest and impost important impact would be seen in the inflation figures, as the report expects CPI to come down by 1.5%. As a potential result of this, the State Bank of Pakistan may consider going for monetary easing of up to 100 bps in the next meeting of the Monetary Policy Committee scheduled in March.
Sector-wise, the report states that Cement, Auto, Steel & Gas, and Chemical sectors are going to be the major beneficiaries, as a cut in oil prices would lead to a decline in interest rates as well as lower energy costs.
On the other hand, Oil and Gas Exploration Companies are likely to suffer most of the brunt (for fairly obvious reasons), with Pakistan Oilfield Limited showing the largest vulnerability.
Oil Marketing Companies shall also be exposed to the negativity emanating from lower prices, mainly because their oil and RLNG margins are fixed as a percentage of oil prices. While these companies are also at the risk of facing high inventory losses, a cut in interest rates along with improvement with circular debt would automatically suppress the decline in earnings.
If the State Bank does go ahead with monetary easing as stated above, the Banks will suffer as their Net-Interest Income would fall as a result of lower interest rates.
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