As the world starts to re-open economies after months long lock down, Oil analysts around the globe are predicting end of oil price crisis. Pakistan has been one of the beneficiaries of this price crash as we have been able to improve our fiscal deficit and external account situation with lower oil import bills. However, as there are reasons to predict increase in oil prices, there are also some factors that can unexpectedly takeover the hopes of oil companies.
Reasons for Oil Prices to Stabilize
A recent phone conversation between US President Trump and Russian President Vladimir Putin regarding OPEC+ oil production is a positive note for oil industry that hopes for rise in oil prices. Similarly, Saudi Arabia is expected to present a price strategy on June 5, 2020 in which they aim to stabilize prices for oil commodity.
The previous OPEC+ deal between Saudi Arabia and Russia failed to provide any support for oil prices owing to excessive fall in oil demand as the world went in to lockdown.
Read More: How OPEC+ deal fails to save Oil Industry
Moreover, the US oil production has declined by more than 10% since March which is mainly due to US shale producers closing down oil rigs as they fail to reach even break even prices. This has overall reduced production of oil and with expectations of renewed demand of oil after lock down ends, the gap between supply and demand is expected to reduce.
Reasons for Oil Prices to remain Volatile
There are however, several evolving factors that can affect this assumption of oil price recovery. These include recent U.S., U.K., Canada and now New Zealand riots and protests that are raising alarms for possible resurgence of Covid-19 and that too with bigger thrust.
Secondly, the global demand for oil might remain stagnant for some time despite re-opening of economies. Most of the oil companies are now considering expanding into alternate energy businesses to hedge their risky positions.
U.S. Oil Rigs falling at Fastest rate on Record
With U.S. being the largest producer of crude oil in 2019, the oil rigs in US are now facing huge losses with production cost exceeding sale price. From March onward, the U.S. rig count has declined substantially (65% down) since March. In March 2020, the U.S. oil production was around 13 million barrels per day (bpd) which dropped to 11 million bpd as 10 out 22 oil rigs shut down in the country.
Overall, U.S. shale companies are trying to cut their E&P capital expenditure by 30% since even at $40 per barrel, oil production is not sustainable for the companies and experts predict that oil will not reach $40, at least this year.
Implications of Oil Prices for Pakistan
Pakistan has been a major beneficiary of oil price crash as the finance ministry utilized this drop very efficiently in covering up for economic losses owing to Covid-19. During July-March 2020, Pakistan was able to reduce its fiscal deficit by a whopping 73% mainly on back of reduction in oil import bills.
The continuous decline in oil prices was not immediately reflected in fuel prices or fuel surcharge in electricity bills. However, under the congested economic conditions in Pakistan due to Covid-19, Federal government was able to provide relief to the masses not only in form of economic stimulus but also reduction in fuel prices which in turn reduced inflation rate to 8%.
Although, price stability in oil prices means resumption of global activity and thus, is a positive news for Pakistan as well, yet any increase in import bills means widening of fiscal deficit specifically with dollar’s continuous upward flight.