With almost one week of 2010-11 remaining, WTI and Arab crude, benchmark for Pakistan oil prices during FY11 have surged by 22 percent and 52 percent, respectively. Most importantly, sharp increase in Arab gulf crude, as compared to WTI, is indicative of changing demand pattern of international oil markets.
"Amid popular uprising in the Mena (Middle East and North Africa) region and turbulence in currency markets, crude oil prices remained on the higher side in the outgoing FY11", analysts said. On the local front, the rise in the international oil price unleashed the pricing Pandora's box where the government attempted various measures (reducing PL, fixing OMCs margins and abolishing wharfage and incidental charges) to keep the domestic oil prices under check, Nauman Khan, an analyst at Topline Securities said.
Despite all these measures, local oil products prices grew by 28-60 percent with diesel and petrol prices touching their all time high in May 2011, he added. FY11 once again was marked with high volatility in the international oil prices primarily on account of political unrest in Middle East and uncertainty surrounding the global economic recover. Where WTI crude prices jumped by 22 percent on closing day basis, average prices stood at $89 per barrel (up 19 percent on year-on-year basis). On the other hand, Arab light crude oil prices, a benchmark crude for local energy companies, rose by a massive 52 percent during FY11 whereas average price stood at $91 per barrel (up 24 percent on year-on-year basis).
However, Arab light in FY11 traded at average premium of $3 per barrel (3 percent) to WTI against last 5-year discount of $2 per barrel (-3 percent), indicative of changing demand patterns of the international oil market. The premium currently stands at $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 going up 45 percent and price of the FO (furnace oil) by 46 percent in FY11.
The rising trend in the international oil prices rose concerns for policy markers to keep domestic oil prices in check. The government initially abolished incidental and wharfage 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 (petroleum levy) which was slashed to bear minimum on various petroleum products. In particular, PL on diesel was eventually slashed to Re 0.55 per litre originally from Rs 8 per litre.
"With little room left, the government eventually had to pass on the price hike to final consumer in May-11", he said, adding that overall the price of regulated products including petrol, diesel, kerosene and LDO increased by 28-29 percent. Similarly, furnace oil, which is totally deregulated and mainly used in power generation, increased by massive 60 percent. "Going forward, we expect global oil market to display high volatility on account of divergent views regarding the global economic health", he said.
"However, based on prevalent trends, we expect oil prices to remain firm around the levels of $96 per barrel in FY12", he added. "Our long-term oil prices assumption remains $90 per barrel", he said. In turn, firm oil prices are expected to bode well for E&P and refinery sector, while being a source of inventory gains for OMCs, he added.
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