Global crude oil fluctuations not to affect Indian cos’ margins
The events of the past week have shown the futility of forecasting oil prices over the near term. Iran claims it has arrested 15 British sailors and marines for trespassing on its territorial waters.
By TNN |
MUMBAI: The events of the past week have shown the futility of forecasting oil prices over the near term. Iran claims it has arrested 15 British sailors and marines for trespassing on its territorial waters.
Britain says the men have been kidnapped. We don’t know who’s right, but the petroleum market reacted immediatly – the price of benchmark WTI (West Texas Intermediate) has shot up from mid-50s to mid-60s now.
The spike also put paid to any hopes that the oil marketing companies may have had, of getting back in the black. Going forward, however, some expect crude oil prices to ease. HSBC has projected an average crude oil price of $55/barrel for 2007 and $45/bbl for 2008.
A recent report by Citigroup has projected an average price of $58-60/bbl for the current year that could fall to $52.5/bbl in 2008. Not everyone shares the optimism though. Goldman Sachs expect crude oil price to average $66-68/bbl from 2008-10.
Given the current dynamics of the Indian oil industry, the spike in crude oil prices is unlikely to impact any of the big oil players here. The downstream oil companies – Bharat Petroleum, Hindustan Petroleum and Indian Oil – are currently selling their key products at a loss.
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They are compensated by the government in the form of oil bonds. The quantum of oil bonds depends upon the extent of loss – hence a price fluctuation doesn’t impact returns. For upstream ONGC, any upside from higher oil price will be mostly passed on to the downstream players as subsidy. For Reliance, which is primarily a refiner, cost of crude oil is immaterial; what matters are refining margins – the difference in crude oil and petro-product prices. There is less uncertainty surrounding the refining sector.
The petroleum refining business has enjoyed a strong run for the past few years due to capacity shortages. These are expected to fall by 2009, as more capacity is commissioned, primarily in Asia.
A total of 4.5 million barrels/day of fresh refining capacity is expected to be commissioned in Asia by 2010. India will be a big contributor, as two greenfield refineries are being put up currently, by Reliance and Bharat Petroleum.
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Over a shorter time frame, refining margins had fallen in the beginning of 2007, but are expected to recover over the next few weeks, as a number of refineries are undergoing maintenance shutdowns. March is the lowest oil demand season as it falls between the winter and the driving season in the US. Hence most of the shutdowns are scheduled in this period. This would be good news for standalone refiners like Reliance, MRPL and Chennai Petroleum.
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