“We will get the fiscal space for prepayments”: Pakistani official
SoDATA — Oil prices have now plummeted by about two-thirds this year, with a price war between Saudi Arabia and Russia compounding the impact of the coronavirus pandemic.
European stock markets slipped again on Monday, while oil prices dropped to their lowest point in 18 years.
The declines in Europe came after stocks across Asia fell on mounting fears that coronavirus would cause a collapse in global demand.
The latest slump in oil prices in the US came after President Donald Trump extended social distancing guidelines in the US until the end of April, raising new concerns over the pandemic’s economic impact. A senior government medical adviser in the US warned on Sunday that up to 200,000 people in the country could die, The Financial Times reported.
Robert Rennie, global head of market strategy at Westpac, told FT there was “no end in sight” to the pressure on crude prices, pointing to the rising number of coronavirus infections and the lack of any agreement between Saudi Arabia and Russia to cut production. “You’re getting closer to the point where you begin to run out of storage capacity — be that tanks, pipelines or crude carriers,” Mr Rennie added. That could lead to oil producers paying buyers to take their crude to avoid more costly storage fees, he said.
Will all these lead to oil dumping and eventually to becoming a stranded asset of some producers?
“Not yet, because the world still needs oil. Once the politics is over then it will settle to around $50”, says Hasham Bin Sadique, who heads the Islamabad Policy Research Institute (IPRI) think tank.
Toronto-based Energy expert Rashid Husain Syed also says dumping may not be on the horizon. “Technically, dumping would be a word for selling below cost. Now what is the Saudi cost? Most believe it is $2-3/barrel. They are selling above that. Russians are selling above their presumed cost of $7. So in technical jargon, it is not dumping”.
According to Syed, for sometime now, many have been insisting, that with fossil fuel demand falling alternatives are on the horizon. Consequently, some assets would remain stranded. “That is why the rush to sell as much as possible crude at whatever the price. Many see Aramco IPO from that prism too. Even Aramco has conceded another three decades before peak demand. And physical price is already in single digits for some grades. The pain continues.”
Dr. S.M. Ali, a geopolitical analyst in Islamabad says “oil consumption and prices will decline leading to huge pressure on Pakistan because of 1. lower forex remittances from (the) Middle East and perhaps exodus of Pakistanis due to coronavirus as well as lower labor demand.”
A Pakistani defense expert based in Mideast gave a wide-angle view on the oil price war: “I think it’s test for MbS. He has to make a choice between US and Russia. Due to his own survival at stake, he chose US (especially Trump). Although people are talking about disadvantage to US Shale industry, but its a long term impact of this price war. In short term, the lower crude prices will help US domestically.”
A closer to home view by Athar Hussain, a Pakistani professional is that falling oil price is “Good for oil refineries”. No doubt. As the decline in the oil price gets reflected in imports the Petroleum Levy could yield additional revenues for Pak government, says a recently published position paper.
The fall in oil price will definitely reduce import bill, but is unlikely to effect the bottom line in the final analysis”, a Pakistani official says. Another official pointed out the temporary reprieve that government will get to handle its mounting debt markup payments. “We will get the fiscal space for prepayments”, the official said.
On Monday, economists at Nomura estimated a worst-case scenario of almost 7 per cent contraction for the global economy in 2020.
Earlier, the Moody’s rating agency forecast that instead of an over 3 percent growth in 2020, world economy will now see negative growth due to Coronavirus pandemic.
The EIU has projected that the growth rate in 2020 will fall, for example, in China from 6 to -1.5 percent, in India from 6 to 1 percent and in Turkey from 4 to -5 percent.
The magnitude of the negative impact globally is so large that some writers have suggested that it will be even worse than the Great Depression.
Conditions are unlikely to improve till 2021, the Pakistani position paper pointed out.
