Oil prices crash amid economic slowdown

September 07, 2024 (MLN): Global oil prices plummeted this week as demand concerns and a likely rise in supplies out of Libya outweighed delays in output rise by the OPEC+ producers.

Brent crude futures settled the week at $71.06, the lowest closing level since November 2021.

Meanwhile, West Texas Intermediate (WTI) dropped to $67.67, marking its lowest point since March 2023.

Both benchmarks experienced these declines after witnessing weekly losses of upto 8%—the steepest drop since October 2023.

Notably, this was the third consecutive weekly drop in oil prices arising from weak demand signals from China, the world's biggest oil importer.

Initially, the week commenced in a bright zone for the commodity as supply concerns from halted Oil exports at major Libyan ports supported prices.

However, the gains soon took a reversal on potential signals of a deal to resolve the dispute, which eased concerns about oil exports from Libya.

This became a major loss for oil futures as eased supply disputes triggered a massive sell-off of the commodity, dragging it to lows.

Following this news, OPEC+ considered delaying a potential increase in oil output to counterbalance Libya's production rise, in the hope of supporting prices.

Nonetheless, another setback emerged as economic data from the U.S. revealed that manufacturing had contracted, adding to demand concerns with China.

Markets took a further hit after U.S. jobs data clocked in weaker than expected in August, implicating that the economy is on a slide.

However, the signals were not entirely negative as on the other side jobless rate fell to 4.2% and average hourly earnings rose.

As demand fears from the previous week intensified and supply tensions eased in Libya, the situation worsened, leading to a sharp decline in oil prices.

Impact on Domestic Prices

Fuel prices in Pakistan are determined on a fortnight basis based on international prices. Based on the data from the first week, it appears that the government is likely to cut prices for the second half of September.

This potential cut would make the fourth consecutive reduction in fuel prices.

Furthermore, since the petroleum import bill constitutes the dominant portion of Pakistan's total imports (28.5% in FY24), a reduction in the import bill from lower international prices could ease the negative trade balance and reduce pressure on the country's limited dollar reserves.

However, it is crucial to mention that nearly half a period is left for the next petrol price determination, so this cut is subject to further volatility in oil prices and exchange rates.

Moreover, the U.S. Fed Reserve will meet on September 17/18 and is likely to cut interest rates, which tends to be much-awaited and bullish for the commodity.

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