Crude oil prices have gained over the last week. The recent strength in the commodity has been driven by the Russian decision to reduce its production by 500k bpd, in response to the restrictions placed upon the nation by the G7 countries as a result of its actions in Ukraine.

To note, Russia had opted to reduce its output by 126k bpd in October 2022, as a part of the cut suggested by the OPEC+ group. However, it was surpassing the revised levels.

On the demand side, the Chinese demand growth is expected to pick up pace, with the Covid-19 restrictions being eased and the country bringing its petroleum products exports to a minimum to meet burgeoning local demand.

The IEA has estimated for China’s demand to increase to 101.7 million bpd in 2023, higher by 1.9 million bpd, compared with a year ago.

The European natural gas prices have continued to decline, amid weather forecasts of an end to the current cold alongside a possible restart of the US Freeport LNG terminal, a key supplier to the European market, after it was shut down back in June 2022 due to fire and explosion.

The Japan-Korea marker, which closely mirrors the European benchmark dropped 37 per cent in the current year to-date to currently stand at $17.9/mmbtu, as the warmer weather is expected to begin returning in the second half of February 2023.

Although, the continents gas reserves have declined in recent days, still they continue to remain well above the season averages and continue to provide a strong buffer for any increase in the demand.

Overall, the European gas market has turned its fate sharply from fears of deficit last year to potentially a position of glut if the current low demand and import scenario continues.

In this backdrop, six cargoes from Pakistan State Oil’s (PSO) long-term G2G arrangement with QatarGas continue to power through at Brent slope 13.37 per cent, while three additional cargoes at 10.2 per cent slope resulted in an average price to stand at $10.96/mmbtu for January 2023.

Overall, with the gas price revisions around the corner, improved collection rate alongside possible clearance of the past overdue stock is expected to benefit most of the energy chain, majorly OGDC, PPL and PSO.

The lower LNG prices in the international market are expected to bode well for the country, with Pakistan being an importer of the commodity. To note, in the first half of FY23, the country imported RLNG worth $2 billion.

Further, due to the differential between the spot rates in the international market and the effective price under the long-term contracts, instances of suppliers’ not honouring commitments have increased in the recent past.

Overall, re-entry into the International Monetary Fund (IMF) programme is imminent in the upcoming weeks, inducing a reduction in the circular debt through both power and gas tariffs rationalisation, eventually improving the cash payouts and bringing an end to the stock price overhang of all three major fuel suppliers, namely OGDC, PPL and PSO.