Oil prices witness surge amid popular uprising in MENA

ISLAMABAD, June 24, 2011 (PPI): Amid popular uprising in the Middle East and North Africa (MENA) region and turbulence in currency markets, crude oil prices remained on the higher side in the out-going FY11.

With almost one week remaining, WTI and Arab crude, benchmark for Pakistan, oil prices during FY11 have surged by 22% and 52%, respectively, says a press release issued here on Friday.

Most importantly, sharp increase in Arab gulf crude as compared to WTI is indicative of changing demand pattern of international oil markets.

On the local front, the rise in the international oil price unleashed the pricing Pandora where government attempted various measures including reducing Petroleum Levy (PL), fixing OMC margins and abolishing wharf age & incidental charges to keep the domestic oil prices under check.

Despite all the measures local oil products prices grew by 28-60% with diesel and petrol prices touched their all time high in May 2011.

International crude oil & products market in FY11 once again was marked with high volatility in the intentional oil prices primarily on account of political unrest in Middle East and uncertainty surrounding the global economic recovery. Where, WTI crude prices jumped by 22% on closing day basis, average prices stood at US$89 per barrel (up 19% YoY).

On the other hand, Arab light crude oil prices a benchmark crude for local energy companies, rose by a massive 52% during FY11 whereas average price stood at US$91 per barrel (up 24% YoY).

However, contrary to historic trends, Arab light in FY11 traded at average premium of US$3 per barrel (3%) to WTI against last 5-year discount of US$2 per barrel (-3%), indicative of changing demand patterns of the international oil market. The premium currently stands at US$15 per barrel.

This could be due to higher demand from Asian region especially from China and India. The same price trend was reflective in middle distillate prices, with price of HSD went up 45% while price of the FO (Furnace oil) rose by 46% in FY11.

The rising trend in the international oil prices rose concern for policymakers to keep domestic oil prices in check. The government initially abolished incidental and wharf age charge along with fixation of OMCs in rupee terms. The development adversely affected the profitability margins of refineries and OMCs.

Furthermore, the government also had to take a hit on its PL, which was slashed to bear minimum on various petroleum products. In particular, PL on diesel was eventually slashed to Rs0.55 per liter originally from Rs8 per liter.

With little room left, government eventually had to pass on the price hike to final consumer in May-11. Overall, price of regulated products including petrol, diesel, kerosene and LDO increased by 28-29%, similarly, furnace oil which is totally deregulated and mainly used in power generation increased by massive 60%.

Going forward, we expect global oil market to display high volatility on account of divergent views regarding the global economic health. However, based on prevalent trends we expect oil prices to remain firm around the levels of US$96 per barrel in FY11. Our long term oil prices assumption remains US$90 per barrel. In turn firm oil prices are expected to bode well for E&P and refinery sector, while be a source of inventory gains for OMCs.