OPEC decision to cut output could hurt Pakistan's economy

The Organization of the Petroleum Exporting Countries' (OPEC) decision to reduce oil production by 2 million barrels a day could drive up oil prices, thus proving “detrimental for Pakistan’s economy”, said brokerage house AKD Securities in a report on Thursday.

On Wednesday, the 13-nation OPEC cartel and its 10 Russian-led allies agreed to reduce production by two million bpd from November 2022 to December 2023 at a meeting in Vienna, said Iran’s OPEC Governor Amir Hossein Zamaninia.

It was the biggest cut since the height of the Covid pandemic in 2020. Soon after the announcement, the US retaliated by hinting towards ramping up the rate at which it has released its Strategic Petroleum Reserves (SPR) of oil.

Of the member countries, the greatest cuts have been volunteered by Saudi Arabia and Russia, of about 526,000 bpd each. Other notable cuts are expected from Iraq and UAE, of ~220,000 and 160,000 bpd, respectively.

“The group is motivated to keep prices higher in order to shore up the fiscal revenues of the member countries,” said AKD Securities.

Following the decision, the price of oil shot up and is currently trading above $93 per barrel, as it stabilised near three-week highs.

Meanwhile, the demand for oil is expected to increase in the winters this year, as natural gas prices have increased to levels where usage for power production and heating is no longer viable, the brokerage house said.

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This could translate into high crude oil prices, which would keep the economy of Pakistan under pressure, in the form of higher import bills, as petroleum group imports account for 30% of total imports in FY22, along with inflationary pressures, said the report.

“Hence, higher crude oil prices could prove to be detrimental for Pakistan's economy,” it said.

Furthermore, the report said that 9% and 19% of power generation in FY22 was on furnace oil and RLNG, respectively, the prices of which track international oil prices, hinting at a price jump in these commodities following a rise in demand.