While the Economic Coordination Committee (ECC) of the cabinet approved a Rs20 billion subsidy for oil marketing companies (OMCs) and refineries to ensure the uninterrupted supply of petroleum products in the country, analysts and market watchers have questioned its sustainability amidst soaring global oil prices as Brent crude peaked all-time high at $114.24 a barrel on Thursday.
Uncertainty over where and when supply will come from to replace crude from the world’s second-largest exporter Russia in a tight market has led to wide-ranging forecasts for oil prices between $100 and $200 a barrel.
Market analysts say that the government-backed subsidy for OMCs and refineries may have provided a cushion for time being, the government will again have to jack up oil prices to bridge the gap as the subsidy will hardly be enough to import the commodity for the next couple of weeks.
Analyst Wajeeha Saajid said that political exigency has prompted the government to lower the oil prices by Rs10 per litre to mainly appease consumers, it will ultimately have to raise prices in the next couple of weeks as it did not have the fiscal space to further provide a subsidy to import the crucial commodity.
She said that until a solution to the Russia-Ukraine conflict is found, international oil markets will remain jittery as OPEC countries have not come up with a firm commitment to boost the output to make up for the short supply amidst international sanctions on Russia. The analysts said that the government will have no option but to raise the oil prices in near future.
Another market source said that the rupee was under tremendous pressure against the dollar and it was eating up foreign reserves and the government cannot afford to further subsidise the commodity.
The source said that given the international geopolitical situation, Pakistan is currently in a precarious situation.
Oil prices rose on Thursday following a sharp drop in the previous session as the market contemplated whether major producers would boost supply to help plug the gap in output from Russia due to sanctions for its invasion of Ukraine.
According to Reuters, prices slumped on comments from UAE’s ambassador to Washington saying his country will be encouraging OPEC to consider higher output to fill the supply gap due to sanctions on Russia after it invaded Ukraine.
While UAE and Saudi Arabia have spare capacity, some other OPEC+ producers are struggling to meet their output targets due to underinvestment in infrastructure over the past few years, which will limit their ability to lift output further.
“We think it will be challenging for OPEC+ to boost production in this environment,” Reuters quoted Commonwealth Bank commodities analyst Vivek Dhar as saying.
However, Standard Chartered analysts predicted OPEC would look to fill the Russian supply gap, “effectively ending the OPEC+ agreement in its current form”.
