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Russian Oil Shipment to Pakistan Cause Decrease in Petrol Prices

In a significant development, Pakistan has initiated its first-ever order for importing crude oil from Russia. This move is considered a test case, with the shipment expected to arrive in the last week of May or the first week of June.

Read more to know how the discount Pakistan Secured makes this deal particularly appealing, allowing them to purchase the Russian oil at a reduced price of up to $18 per barrel compared to prevailing rates.

Pakistani officials will closely examine the economic aspects to determine the feasibility of producing petroleum products from Russian oil. This step reflects the nation’s interest in exploring alternative sources of oil and refining capabilities.

However, it is worth noting that the United States has urged Pakistan to consider the price cap enforced by the Group of Seven (G7) nations while engaging in oil deals with Moscow.

On December 3, 2022, the G7, comprised of highly industrialized countries, formally established a price ceiling of $60 per barrel for Russian oil. This measure aimed to curtail Russia’s oil revenue, which was reportedly being utilized in the ongoing conflict with Ukraine. Simultaneously, the objective was to ensure a steady oil supply from Moscow to global markets and avoid potential shortages.

The ongoing Russia-Ukraine war has sparked a significant increase in oil prices worldwide, placing European Union member countries at risk of petroleum scarcity this year. While Russian oil is known to have certain quality limitations and higher freight costs, Moscow has extended a discount to Islamabad to match the price and freight of superior-quality Arab Light crude.

Russian oil in Pakistan low Petrol Prices

Pakistani oil refineries currently process Arab Light crude, but switching to Russian oil may disrupt the current economics of oil production due to variations in the ratio of refined petroleum products.

Arab Light crude yields 45% high-speed diesel (HSD) and 25% furnace oil, while Russian crude produces 32% HSD and 50% furnace oil. These differences imply that Pakistan might require a more significant discount on Russian crude if the current lower price fails to compete with the cost of Arab Light.

Pakistan’s refineries have already encountered challenges in finding buyers for furnace oil since power producers have shifted to liquefied natural gas (LNG) to run their plants. Consequently, the refineries have resorted to exporting furnace oil and faced partial shutdowns on multiple occasions due to reduced demand.

Recently, Pak Arab Refinery Limited (Parco) had to scale down its operations to 75% of production capacity after oil marketing companies (OMCs) declined to lift petroleum products. To address inventory levels, Parco has also ventured into furnace oil exports.

Russia has proposed accepting payments in currencies other than the US dollar to ease payment challenges. Pakistan has been offered to pay in the United Arab Emirates (UAE) dirham, Chinese yuan, or Russian ruble.

As per insider information, Pakistan plans to pay Russia in Chinese yuan, and the Bank of China will open Letters of Credit (LCs) for oil imports. Opting for Chinese currency transactions serves a dual purpose: evading potential sanctions imposed by the US on Russia and overcoming the shortage of dollars in Pakistan, which has hindered LC operations.

Pakistan’s scarcity of dollars makes settling payments for Russian crude in the greenback challenging. Local banks had previously refused to facilitate dollar payments for a foreign company offering Russian crude oil to a Pakistani refinery. The recent restrictions on opening LCs have adversely affected various sectors, making the option of paying for Russian oil in Chinese currency a significant relief.

In conclusion, Pakistan’s decision to import Russian oil marks a significant step towards diversifying its oil sources and exploring potential economic benefits. The discounted and flexible payment options provide a promising opportunity, although the country must navigate price regulations.

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