As Brent crude stays firm staying over $85/bbl, showing strong resistance – energy commodities outside of oil have started to show the impact. The continued tightening of the oil market has now entered a new phase, with Saudi Arabia declaring its policy of continuing with the unilateral massive production cuts for longer – and may even deepen the cuts if need be. The deepening part is where the bulls find the strength from – as the Kingdom appears to be in no mood to let prices slip again.
Almost all chartists now agree that Brent is officially in bullish territory, pinned by record demand seen in the last two months. Both June and July of this year have seen higher demand for crude oil than ever before – and the demand stays strong in most part of Asia, especially China and other Far East Asian countries.
Elsewhere, crude oil inventories continue to face huge drawdowns, as the US stockpile saw the biggest drawdown in months. According to the U.S. Energy Information Administration, crude oil demand is likely to be strong deeper into 2023. China’s surprise rate cut has offered more gas to the bull run, setting aside concerns over the efficacy of Chinese growth recovery and stimulus impact. The US inventory levels are well below the 1000-day moving average, which has raised alarm bells as supply concerns refuse to fade away.
The spreads in the Asian markets are getting higher as demand for sweet Asian barrels grows, due to refineries opting out for heavier and cheaper crude. Refinery margins are on the rise again, as evident from the increase in retail gasoline prices in much of the West. Optimists are pinning hopes on revival of production from Canada and US in the next three months – but any attempt to increase global supply has been met with an equal and sometimes bigger response from the Saudi led Opec group. Saudi Arabia has not hinted any shifts in its stated policy of keeping the oil markets a sellers’ market – and has time and again shown the resolve to go to any lengths to ensure that.
For Pakistan, this spells more bad news. As peak power demand months approach, the increase in crude oil price would likely to increase in other energy commodities – especially coal and LNG. Pakistan’s reliance on imported fuel, despite improved generation mix is well documented, and this would mean another round of substantial upward adjustment in electricity (and gas) tariffs – from the current rates, which are already as high as Rs60/unit in some use cases. Meanwhile, Pakistani authorities continue to show slack in terms of implementing Weighted Average Cost of Gas mechanism to retail gas prices – despite the relevant law in place.
Petroleum prices could soon touch a dollar a liter, given how the currency has weakened of late. Nothing short of an extreme global demand shock will rebalance the global crude oil market, and Pakistan can only hope against hope that it is not on the receiving end of another energy commodity extended bull run, two years in running.
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