LAHORE: The Organization of Oil Exporting Countries, namely OPEC, met on Sunday to discuss the production targets of crude oil for the next two months. Moreover, the EU decided to impose an embargo on Russian imports and G7 decided to cap the price of the Russian crude oil at $60. All this has caused the crude oil market to behave more abnormally than it should have. To understand all this, here is a little context.
Crude Oil is one of the most important commodities of the world, the by-products of which are LNG, Petrol, Diesel, Jet fuel and Furnace Oil etc. In 1960, to negotiate the prices of Crude oil with the world and to have a united front, The Organization of Oil Exporting Countries (OPEC) was formed. Since then, OPEC has been able to acquire 13 members. An extended alliance of the OPEC is called OPEC+, that not only has the 13 OPEC members but also includes additional 10 producers of crude oil, including Russia. Together, OPEC+ controls more than 60% of the entire world’s crue oil and is, therefore, at the driving seat of crude oil pricing.
Since the last few weeks, the increase of COVID-19 cases in China has raised concerns for the global oil market. The OPEC+ in its last meeting said that they will adhere to the production targets for the rest of this year. Even though there has been a cut back in those targets, China being one of the biggest buyers of crude oil makes a huge impact. This meant that the reduced demand from China would leave surplus crude in the market, which led the prices to fall and the oil market was set to crash even further.
Things took a turn when the G7 countries also decided that they will put a price cap of $60 on the Russian Urals Crude oil. The EU already has an embargo (no trade), going on with Russia, with the increased sanctions from G7, there is a high chance that Russia will take a hit on its energy cash flows. Russia has threatened to not deal with countries who adhered to the $60 price cap. Currently the Russian Urals is trading at a massive 40% discount as compared to Brent oil, where India and China are the only major buyers left in the market.
The markets saw a near 2% increase in prices of Brent and WTI crude, as Russian Crude went out of the mix for more countries after the G7 meeting. The news of Chinese lockdowns starting to ease in a few cities also were a cause of the price spike. Since then, Chinese state channel, Xinhua, has reported that “China’s National Development and Reform Commission will cut gasoline and diesel prices by 440 yuan (about $62.51) per tonne and 425 yuan per tonne, respectively starting Tuesday”. The news has once again caused a decline back to its original price in the Brent and WTI benchmarks.
“The OPEC+ decision to keep production unchanged, along with weak economic data out of China, however, could reverse oil’s price gains” , said Leon Li, a Shanghai-based analyst at CMC Markets.
What does this mean for Pakistan? Pakistan is currently under an IMF program. To procure affordable petrol, that doesn’t cause inflation to go up, is paramount to Pakistan’s position in that program. This is because the program hinges on the petroleum levy, and therefore on the crude oil price. Petroleum Minister Musaddek Malik has hinted at progress that was made in his recent trip to Russia.
Russia or Arab oil; prices coming down is a positive sign for Pakistan and its people. Last week, the government increased the levy on diesel and light diesel oil, signaling that price falls might not translate into tax breaks. However, the winner will be the crippling economy of Pakistan in either case, whether it comes in the form of a primary surplus or retail price decrease. What happens, though, if China deals with the new wave of COVID and OPEC’s reduced production targets still remain intact, is only a pessimist’s guess at this point.