Macro, market & sector: Opec decision to freeze oil output brings multiple implications for Pakistan

The surprise decision in the Opec meeting to freeze oil output brings multiple macro, market and sector implications for Pakistan, analysts said. The members of Opec have agreed to reduce oil production to 32.5 to 33 million barrel per day from 33.4 million bpd. "From the macro front, while we see limited first-round impact on CPI from every $5/bbl hike in oil prices assumption (FY17E base-case assumption of $46), the concerns on external account and currency may gain further traction," Mohammad Fawad Khan at KASB Securities said.
He said Opec decision and likely strong oil prices should bring two index-heavy weight sectors- E&Ps & Banks- in the limelight and may serve to drive focus away from side board 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. "We reckon 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 $40-50 to $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.
While implication on Pak economy following recent Opec decision remains dependent on the extent of oil price move, the optimal scenario for Pak 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 ($1 billion Eurobond expected next month and other non-IMF flows). "In worst case of protracted surge in oil prices, we see negative implications on macroeconomic stability," he said.
He said a $5/bbl increase in oil prices for the year would increase import bill by $1.0 billion in FY17. He said it would be positive for E&Ps, OMCs, IPPs, textile and banks. It is estimated 10/8/7/6 percent change in earnings for every $5/bbl change oil prices for POL, Mari, PPL and OGDC, respectively. POL has the highest share of revenue coming from oil at 45 percent while Mari's earnings are the most sensitive to oil prices due to gas pricing.