Decline in International Oil Prices to Benefit Pakistan: Brokerage House

The decline in global oil prices is set to benefit Pakistan as it is a net oil importer, brokerage house JS Global said in a report on Thursday. The report said that following a surge in 1HCY24, global oil prices have retreated by approximately 20 percent ($17/bbl) in the past 5 months, reaching their lowest point in 15 months at $72.9. In essence, the said price has hardly sustained below $73/bbl since 4QCY21, making the prevailing pricing among the lowest in 3 years. The report said that oil plays a pivotal role in the country’s two most critical economic indicators i.e., trade balance and inflation. The trade data for July 2024 indicates that crude oil and petroleum product prices were purchased at an average of $83/bbl, where global oil prices have reduced 12 percent ($10/bbl) from those levels. A decrease in realized oil import prices would positively impact the import bill, potentially reducing the CAD estimate for FY25 by around $800 million (0.2 percent of GDP). A drop of $5/bbl reduces the annual import bill by around $900 million (0.25 percent of GDP) – almost 10 percent of existing SBP FX reserves of $9.4 billion, the report noted. Lower oil imports may also spare room for some non-essential imports, keeping the current account balance close to breakeven, the report noted. On the inflation front, the report noted that the ongoing disinflation trend, bringing headline CPI back to single-digit after 3 years, has been one of the key reliefs for the country, resulting in the initiation of a monetary easing cycle after 4 years. The recent softening of oil prices has begun to contribute to CPI, with around a 5 percent reduction in POL product prices in the last 6 months. Second-round effects have yet to be seen in numbers, it added. As any lesser notable decline in POL product prices bears a limited impact on the inflation outlook, the government may seize this opportunity to increase the Petroleum Levy (PDL) by Rs. 10 per liter (around 4 percent of present POL product price level) to its revised cap of Rs. 70 per liter, helping to offset the shortfall in PDL collection due to sluggish OMC sales. The full report by JS Global can be accessed here.