By: Hussain Yasar, Muhammad Saad Ali and Sarah Mazher
+92 21 111 222 000
KASB Securities Limited
With escalating tensions in Iraq, we assess the potential impact on oil prices, and implications for the Pak economy (-ve) and E&P sector (+ve).
Since the bulk of Iraq’s oil fields are located in the South, far from where the latest escalation in violence is taking place, production losses should be limited.
We explore five near-term scenarios for Iraqi oil. The two most likely scenarios are 1) fight turns into a stalemate or 2) Iraq’s army regain control of some areas. We see oil prices increasing to a US$105-115/bbl range under these scenarios. A grand pact would likely take Brent US$5 to US$10/bbl lower.
From a macro standpoint, Brent staying around S$110/bbl would increase Pak oil imports by US$1.1bn; where every US$10/bbl change in oil price swings the current account deficit by US$1.6bn. The impact is partly compensated by rising FX reserves.
Sensitivity analysis for Pak E&Ps highlights that every US$10/bbl hike in oil prices, earnings of OGDC, PPL and POL increase by 6.4%, 6.1%, and 8.6%, respectively. OGDC and PPL are our preferred picks in the sector.
Iraq crisis: Oil prices feeling the heat
BofAML commodity team has lately highlighted the increase in Brent spot prices to US$4/bbl to US$112.94 (up 3.6% MoM) on the back of tension in Northern Iraq, where the Islamic State of Iraq and Syria (ISIS) have seized control of a number of cities in the past few months. As the bulk of Iraq’s oil fields are located in the South, far from where the latest escalation in violence is taking place, hence export losses should be limited. The team, while highlighting the most likely scenario is of Brent staying above US$110/bbl, has pointed out the possibility of Brent swinging up by US$40‐50/bbl in case ISIS invades Southern Iraq, leading to a 2.6mnbpd oil export loss