OPEC oil output freeze may affect Pak economy

Import bill to be up by $1b

Amanullah Khan

Karachi—The surprise decision in the OPEC meeting to freeze oil output may bring multiple economic implications for Pakistan including possible increase oil import bill by one billion US dollars in 2017.
According to financial analysts, A US$5/bbl increase for the year would increase import bill by US$1.0billion in FY2017.
The current oil price rally resulted in an increase of more than 5% to US$47.40/bbl in previous session after OPEC surprisingly reached an agreement, to limit crude oil production from Nov-16. OPEC said it would restrict the output at a range of 32.5-33.0mnbpd as compared to the current output of 33.24mnbpd. In addition, U.S. crude oil stocks fell by 1.9mnbbl, compared to the expectations of 2.4mnbbl increase. However, investors await some clarity on the deal about which countries will decrease production.
From the macro front, while there is a limited first-round impact on CPI from every US$5/bbl hike in oil prices assumption), the concerns on external account and currency may gain further traction. OPEC decision and likely strong oil prices can bring two index-heavy weight sectors- E&Ps & Banks, in the limelight and may serve to drive focus away from sideboard back into main board. From the sector perspectives, higher oil prices and likely pressure on currency are clear positives for E&Ps, OMCs, IPPs, Textile and Banks but negative for Cement, Refineries, and Chemical. While initial response of oil market suggests market showed an apparent lack of confidence in pricing in a sudden reversal in oil market dynamics seen, before OPEC shelved managing the market.
It is believed that OPEC members are likely to be more contemplative of sudden move in oil prices and the relief it provides to non-conventional hydrocarbon sources and competing alternate fuel.
All in all, the deal will likely provide a much-needed floor on oil prices, allowing prices to break through the current range of US$40-50 to US$50-60/bbl in coming months. The details on country level production quote, maximum production allowance for Iran and Libya and any arrangement with non-OPEC oil producing countries are crucial and may serve to build market confidence on sustainability of market management.
The implication on Pakistan economy following recent OPEC decision remains dependent on the extent of oil price move, the optimal scenario for Pakistan economy remains measured increase in oil price, which the government would attempt to pass-on sooner rather than later, given upcoming election year 2018. While the same would still be negative for the current account, near-term risk to currency stability would be mitigated, thanks to potential financial account flows (US$1bn Eurobond expected next month and other non-IMF flows). That said, in worst case of protracted surge in oil prices, there is possibility of negative implications on macroeconomic stability.

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