KARACHI: The oil and gas exploration and production (E&P) sector has outperformed the benchmark 100-share index of the Karachi Stock Exchange in the last four trading sessions by 12 per cent.

The rally is fuelled by the recent leg of three-day rise in the international markets that saw oil prices bounce 20pc from their six-and-a-half-year lows.

On Thursday, however, oil prices settled down, with Brent falling back below $50 a barrel on concerns about global demand for petroleum. “It’s unwise to chase oil stocks while peering each day at the trading screen in response to changes in oil prices,” said an E&P sector analyst.

Sector strategist Muhammad Affan Ismail of BMA Capital Management Ltd affirmed that “the fundamental picture remains unchanged and we believe the latest rally was just a temporary run”. Oil prices could slide in the near term, and analysts believe there are a host of factors to make this happen: weak global macros, start of US refinery maintenance season and hike in the US interest rates by the year-end.

At the same time, possible start of crude exports from Iran — expected by the second half of this financial year — may aggravate the situation.

US President Barack Obama secured enough Senate votes on Wednesday to ensure that his Iran nuclear deal does not die in Congress, but the Republican-dominated Congress could still reject the agreement. “Therefore, the upcoming voting in Congress on Iran deal and possible emergency Opec meeting in September would remain critical to oil price direction,” said an energy sector expert.

No-one in his lifetime is expecting to see oil prices again at anywhere near the all-time high in June 2014 — $115 a barrel. Oil sector watchers are looking at the crude to ebb and flow between $45 and $55 a barrel in FY16 and FY17. “The $10 per barrel is scarcely exciting,” said a person who tracks the oil graph for an energy company.

Although the E&P companies drilling in the country have been able to spud with greater success than ever before — joint-venture partners Mari Petroleum and Pakistan Petroleum on Wednesday announced hydrocarbons discovery including 50 barrels per day of oil in Hala block, Sindh — investors are not really jumping with joy as the indigenous production accounts for just 20pc of the country’s demand.

“Pakistan imported petroleum products and crude worth $14.8 billion in the fiscal year ended June 30, 2014,” reminded Muzammil Aslam, the managing director of Emerging Economies Research. He pointed out that it was calculated at $100 a barrel.

Analyst Shahbaz Ashraf of brokerage Arif Habib Limited noted in a report on Thursday that oil sales rose by 5pc to 1.81 million tonnes in August from 1.71m tonnes a month ago. However, on a year-on-year basis, the industry sales were down 3pc, led by furnace oil.

“We expect oil consumption to post a modest 5pc year-on-year growth in FY16 to 23.23m tonnes, compared to 22.16m tonnes in FY15,” analysts said.

Higher consumption could brighten the bottom line of energy sector companies. And the fall in crude may come as a big blessing for the economy, but investors in stocks of the oil and gas sector — the second-heaviest capitalised after the banking sector with a weightage of nearly 10.5pc in the KSE-100 index — are at a loss to decide whether to stay away or enter the slippery sector, which includes exploration and production companies, oil and gas marketing companies and refineries. The high-priced stocks on those sectors are as likely to climb as to take a tumble.

Published in Dawn, September 4th, 2015

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