By: Arif Habib Limited
The Barrel Drop: Oil Prices Slip to a 4-Year Low
Oil prices have undergone a significant decline since Jul-14 West Texas Intermediate (WTI) was down by ~9% in just a month to reach USD 82/bbl (a 28 month low since Jul-12). Concurrently, Arab Light also experienced similar trends, with a price of USD 82/bbl by mid of Oct-14 (~8% decline in the month) down to an almost 4-year low.
What Has Led To Drop In Oil Prices?
Numerous reasons have piled up simultaneously triggering this sudden price drop. Filtering out short-term triggers, we believe prices will most likely stay range bound at current levels of USD 85/bbl for FY15E. Several factors have contributed to recent dip, but we view slowdown in global economies led to slowdown in oil demand along with unanticipated supply increase to be key factors responsible.
Drop In Other Commodity Prices
In addition to this, weakened economies in particularly China and over supply condition in US has led to significant decline in global commodity prices. Major commodities such as Coal, Steel, Cotton and Copper on average lost 20% of their value since Jul-13. Global commodity index (GS Commodity Index) a benchmark for commodity prices was down by 19% since Jul-13.
Positive Economic Implication
On broader scale, fall in crude oil prices means lower subsidy burden and lessening pressure on external accounts. Moreover, some benefits of this would eventually trickle down to many other manufacturing companies and to some extent, agricultural sector as well, hence growth positive. Specifically, a general trim down in key macro risks, means Pakistan could easily come in terms with quantitative targets set by IMF such that pertaining to cutbacks in power sector subsidies and maintenance of net FX reserve positions.
Capital Markets: A Mixed Bag for Equity Market
There are two ways of looking at this; firstly reduced key macro-risk could provide potential impetus for the market as whole, while sector specific impacts vary. For oil specific, in our view key beneficiaries would be chemicals and paints which could see better operating margins. E&P’s may witness across-the-board margin erosion and OMC sector may register one time inventory revaluation losses. For refineries lowered oil prices could have mixed impact, including one-time inventory loss and refinery margin expansion (keeping in view final POL prices stay intact).
The KSE-100 Index has shed 1.3% in the last two trading sessions; however MTD the equity market has recorded a nominal return of 0.9%. The decline of 380points in last two trading sessions can almost entirely be attributed to Oil & Gas sector, which comprise nearly ~22% of KSE 100 capitalisation