JS Securities Limited – Morning Briefing

Karachi, June 26, 2018 (PPI-OT): E and Ps: OPEC and non-OPEC production relaxation weighs down oil prices

In a major move, OPEC decided to relax its rules on production cuts with Russia. The development will pave way for additional 1mmbbls/day of oil production.

Since the decision, benchmark Arab Light Oil prices have come down by 0.5ppt, Brent Crude by 1.7ppt, whereas WTI has depicted a flattish trend.

Despite the recent movements, oil prices paint a positive picture for nearterm profitability of E and Ps, as net increase in Arab Light Crude during YTD 2018 is 12% whereas PKR has depreciated by ~10% during the same period.

Apart from PKR/US$ movement and increased oil price levels, overall E and Ps sector has underperformed the benchmark KSE-100 index by 2.7% during YTD 2018.

OPEC’s surprise move

In a major move over the weekend, The Organization of Petroleum Exporting Countries (OPEC) decided to relax its rules on production cuts with its non-OPEC partner, Russia. The development will pave way for additional 1mmbbls/day of oil production flowing into the market through reduction in production cut conformity levels back to 100% from 147% recorded in May 2018. To recall, OPEC and key nonmember oil producers curtailed oil production by 1.8mmbbls/day at the start of 2017 to curb oil price glut. The move largely managed to counter pressure on international crude oil prices in the wake of rising US production, which touched 10.9mmbbl/day recently. However, it now seems that OPEC’s grip is loosening up. Since the announcement of production increase on 23 June, 2018, benchmark Arab Light oil prices have come down by 0.5ppt to US$72.94/bbl and Brent Crude by 1.7ppt to US$74.28/bbl whereas West Texas Intermediate (WTI) has remained almost flat at US$68.75/bbl.

OGDC dragging overall performance down

In terms of local E and Ps, we opine that oil price volatility has largely been priced-in and further upside should come from pressure on Pak Rupee against the Greenback and sustaining hydrocarbon production levels. Despite recent movements, oil prices continue to paint positive picture for near-term profitability of the E and Ps sector as net increase in Arab light during YTD 2018 has remained at 12% whereas Pak Rupee has depreciated by ~10% during the same period. Apart from Pak Rupee/US$ movement and increased oil price levels, overall E and Ps sector has underperformed the benchmark KSE-100 index by 2.7% during YTD 2018, mainly due to heavyweight Oil and Gas Development Company (OGDC, down 1.7% 2018TD).

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JS Securities Limited – Morning Briefing

Karachi, June 26, 2018 (PPI-OT): E and Ps: OPEC and non-OPEC production relaxation weighs down oil prices

In a major move, OPEC decided to relax its rules on production cuts with Russia. The development will pave way for additional 1mmbbls/day of oil production.

Since the decision, benchmark Arab Light Oil prices have come down by 0.5ppt, Brent Crude by 1.7ppt, whereas WTI has depicted a flattish trend.

Despite the recent movements, oil prices paint a positive picture for nearterm profitability of E and Ps, as net increase in Arab Light Crude during YTD 2018 is 12% whereas PKR has depreciated by ~10% during the same period.

Apart from PKR/US$ movement and increased oil price levels, overall E and Ps sector has underperformed the benchmark KSE-100 index by 2.7% during YTD 2018.

OPEC’s surprise move

In a major move over the weekend, The Organization of Petroleum Exporting Countries (OPEC) decided to relax its rules on production cuts with its non-OPEC partner, Russia. The development will pave way for additional 1mmbbls/day of oil production flowing into the market through reduction in production cut conformity levels back to 100% from 147% recorded in May 2018. To recall, OPEC and key nonmember oil producers curtailed oil production by 1.8mmbbls/day at the start of 2017 to curb oil price glut. The move largely managed to counter pressure on international crude oil prices in the wake of rising US production, which touched 10.9mmbbl/day recently. However, it now seems that OPEC’s grip is loosening up. Since the announcement of production increase on 23 June, 2018, benchmark Arab Light oil prices have come down by 0.5ppt to US$72.94/bbl and Brent Crude by 1.7ppt to US$74.28/bbl whereas West Texas Intermediate (WTI) has remained almost flat at US$68.75/bbl.

OGDC dragging overall performance down

In terms of local E and Ps, we opine that oil price volatility has largely been priced-in and further upside should come from pressure on Pak Rupee against the Greenback and sustaining hydrocarbon production levels. Despite recent movements, oil prices continue to paint positive picture for near-term profitability of the E and Ps sector as net increase in Arab light during YTD 2018 has remained at 12% whereas Pak Rupee has depreciated by ~10% during the same period. Apart from Pak Rupee/US$ movement and increased oil price levels, overall E and Ps sector has underperformed the benchmark KSE-100 index by 2.7% during YTD 2018, mainly due to heavyweight Oil and Gas Development Company (OGDC, down 1.7% 2018TD).

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