Key points
- Brent ends week below $89 a barrel
- Middle East physical crude remains relatively firm
- Hormuz uncertainty keeps upside risks alive
- Pakistan remains exposed to Arab Gulf prices
ISLAMABAD: Global oil prices retreated this week as crude shipments through the Strait of Hormuz recovered from their lowest levels, although flows remain far below normal and the risk of renewed disruption continues to support prices.
The prices have eased from the sharp war-driven rally seen in July. Brent crude ended the latest trading week below $89 a barrel after the partial recovery in the shipping traffic through the Strait.
Hopes of a diplomatic breakthrough between the United States and Iran were high after Pakistan’s high-powered delegation visited Tehran.
Brent crude settled at around $88.29 a barrel on Friday, August 28, down slightly on the day and more than 5 per cent over the week. West Texas Intermediate (WTI), the US benchmark, settled near $83.40 a barrel after losing more than 4 per cent during the week.
The latest levels represent a substantial retreat from the July shock, when Brent rose as high as about $105 a barrel on July 23 after the breakdown of the US-Iran ceasefire sharply reduced expectations of a quick recovery in Gulf oil supplies.
The International Energy Agency said benchmark crude prices had moved through an unusually wide $40-a-barrel range during the summer as markets repeatedly responded to changes in the conflict and diplomatic outlook.
Physical oil tells a different story
The headline Brent and WTI futures prices do not fully describe conditions in the physical Middle East market, which is particularly important for Asian buyers such as Pakistan.
Dubai, Oman and Murban are among the regional crude markers that actually matter in the pricing mechanism for the physical cargoes in the Asian market.
Murban crude futures were recently around $95.75 per barrel, showing that some Gulf-linked crude remains priced well above the headline Brent benchmark.
There is also no single “kerb price” for crude oil comparable to Pakistan’s unofficial foreign-exchange market.
Physical oil is instead traded through cargoes and assessed through spot and benchmark mechanisms, including Dubai, Oman, Murban and Platts assessments.
These prices can carry premiums or discounts. They also reflect in futures benchmarks depending on supply, freight, refinery demand and the availability of particular crude grades.
That distinction became especially important during the height of the Middle East crisis.
READ ALSO: Oil Prices Fall For Fourth Straight Day On Hormuz Reopening Hopes
Cash Dubai’s premium to Dubai swaps reached extraordinary levels in March as the war disrupted regional supply, with physical Dubai assessed at more than $157 a barrel at one point.
The physical market has since normalised considerably, but it has not returned to completely normal conditions.
Reuters reported that oil shipments through the Strait of Hormuz have recovered somewhat, although vessel traffic remains inconsistent and below normal levels.
The waterway normally carries roughly one-fifth of global oil supplies, making any disruption immediately relevant to prices.
Hormuz remains the market’s biggest risk
The current decline therefore does not mean the geopolitical risk has disappeared.
The market is now balancing two opposing forces. Improved Gulf exports and the possibility of an agreement concerning the Strait of Hormuz are pushing prices lower.
At the same time, uncertainty over the US-Iran confrontation, irregular tanker movements and the possibility of renewed disruption are keeping a sizeable risk premium in crude.
The latest weekly decline also reflects expectations of weaker economic activity if high inflation keeps interest rates elevated.
The structure of the forward market also suggests traders expect some of the current supply risk to ease. The market is therefore no longer pricing the extreme shortage scenario that drove Brent above $100, but it is also not considering the Gulf disruption as resolved.
Oil market implications for Pakistan
The decline is significant for Pakistan because the country’s petroleum market is closely linked to international refined-product and Arab Gulf prices.
Pakistan introduced changes to its petroleum pricing mechanism this year, with the Free on Board component for motor spirit and high-speed diesel linked to Platts Arab Gulf assessments.
The revised mechanism also places a cap on the high-speed diesel refining crack spread, according to S&P Global Commodity Insights.
This means a sustained decline in Gulf-linked crude and product prices could eventually provide relief for Pakistani consumers. However, the impact on domestic petrol and diesel prices will also depend on the rupee-dollar exchange rate, freight, refining margins, taxes and other components of the pricing formula.
For Pakistan’s refineries, the distinction between Brent and regional physical crude is particularly important. A fall in Brent alone does not automatically translate into an equivalent fall in the landed cost of crude or finished petroleum products imported into the country.
