By: Mohammad Fawad Khan,
92 21 5612290-94 Ext 338
Foundation Securities (Pvt) Limited
We believe heightened violence in Iraq threatens to impact Pakistan’s macro and listed companies in many ways as movement in crude prices is also reverberated to other commodities. Brent prices have jumped 3% within few days on account of increased risk of supply disruption. If price increase is sustained, this could add additional US$500mn to import bill and could negatively impact inflation. Among key sectors, E&Ps, and downstream oil are direct beneficiaries of higher prices. Negative sentiments may surround PPL and Lucky, two companies which have investment exposure in Iraq; though we flag actual impact would be quite minimum.
Global supply disruption risk rears its head again: While the events in Iraq will unlikely disrupt country’s oil exports or global supply/demand dynamics, this would highlight to investors that global supply disruption risk is underestimated and spread across a wide group of oil producers. A quick progress by anti-govt. group has already sent Brent prices up 3% within few days. We,for now, remain comfortable with our Brent price forecast of US$112/bbl for FY15.
Bad news for Pakistan macro: Higher Brent oil prices, if sustained can have direct bearing on Pakistan external fiscal accounts and can possibly add to inflationary pressure. The increased crude price, if sustained, could add additional US$500mn to import bill. However, increase in domestic crude production is a positive development. Pakistan’s crude production has jumped 18% since July’13 and is likely cross 100kbpd mark by July’14. Most of production increase in crude was materialized in late 2H. A 20kbpd jump could mean roughly US$700mn saving in oil import bill.