The prices of crude oil on international and local markets remained higher during the concluding financial year 2011is mainly linked by analysts to the popular uprisings in the Middle East and North African (Mena) region and turbulence in international currency markets.
With the conclusion of FY11 just a week away, the prices of WTI (West Texas Intermediate) and Arab crude, the benchmark for Pakistan, have witnessed an upsurge of 22 and 52 per cent, respectively.
Most importantly, a sharp increase in Arab gulf crude as compared to WTI, was indicative of the changing demand pattern of international oil markets, opined analysts at Topline Securities.
On the local front, they said, international trends unleashed a surge in prices while the Government of Pakistan attempted various measures, including a reduction in petroleum prices, fixing the OMC margins and abolishing wharfage and incidental charges, to restrict the uptick in oil prices on the domestic market.
“Despite all these measures, local oil product prices grew by 28-60 per cent with diesel and petrol prices touching an all time high in May (2011),” said Nauman Khan, an analyst at Topline Securities.
He said FY11 once again was marked with high volatility in the global oil prices primarily on account of political unrest in the Middle East and uncertainty surrounding the global economic recovery. WTI crude prices rose by 22 per cent on a closing day basis. Average prices stood at $89 per barrel, up 19 per cent annually.
On the other hand, the analyst stressed, Arab light crude oil prices, a benchmark crude for local energy companies, rose by a massive 52 per cent during the outgoing FY11 whereas average price stood at $91 per barrel, up 24 per cent since last year.
However, contrary to historical trends, Arab light in FY11 traded at an average premium of $3 per barrel (three per cent) to WTI against the last five-year discount of $2 per barrel (-three per cent) indicative of changing demand patterns in the international oil market, Khan said. He added that the premium currently stood at $15 per barrel. “This could be due to higher demand from Asian region especially from China and India,” he underscored.
It was noted that the same price trend was reflected in middle distillate prices, with the price of High Speed Diesel (HSD) escalating by 45 per cent while the price of the furnace oil rose by 46 per cent in the same period.
Khan observed that the prices of diesel and petrol were up sharply during FY11. “The rising trend in the international oil prices rose concern for policy markers to keep domestic oil prices in check,” he opined.
The government initially abolished incidental and wharfage charge along with fixation of oil marketing companies (OMCs) in the rupee terms. But, the development adversely affected the profitability margins of refineries and OMCs.
Furthermore, Khan stated, the government also had to take a hit on its petroleum levy which was slashed to bear minimum on various petroleum products. In particular, the levy on diesel was eventually slashed to Rs0.55 per liter, originally from Rs8 per liter, he pointed out.
With little room for manoeuver left, the government eventually had to pass on the price hike to the end consumer in the month of May. “Overall, price of regulated products including petrol, diesel, kerosene and LDO increased by 28-29 per cent,” he said adding: “Similarly, furnace oil, which is totally deregulated and mainly used in power generation, increased by massive 60 per cent.”
The analyst forecast that the global oil market would display high volatility on account of wildly divergent views on the health of the global economy. “However, based on prevalent trends we expect oil prices to remain firm around the levels of $96 per barrel in FY11. Our long term oil prices assumption remain $90 per barrel,” Khan concluded.