Policy
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India’s Rising Oil And Gas Imports
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India’s Domestic Crude Production: Predicted To Decline Sharply
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Regulation
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L&T’s Entry Into DFCU Is Seen As A Significant Development
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Diesel Buses In India On Their Way Out?
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Growing Relevance Of Arbitration In India’s Oil and Gas Industry
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Alternative Energy / Fuel
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New Projects
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RenewSys To Invest Rs 60 Billion In Hyderabad
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Market Watch
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Companies
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Press Release [FREE Access]
Petro Intelligence » Oil PSUs In Trouble Again

By R. Sasankan

International price of crude oil has risen by 30% in the third quarter of 2023. Global crude oil inventories are at seasonal lows and production cuts, announced transparently by OPEC+ till the end of December 2023 amount to about 3.3 million barrels a day.

Additionally, there is the impact of sanctions on Russian Crude exports, although the exact impact of the $60/barrel cap on exports is difficult to assess. For one, Russia has effectively countered this price cap by significantly raising export of crude to Asia; and second, Russia has maxed her refinery runs to raise her product exports. Based on data in the public domain one can safely say that, including voluntary production cuts, at least 5% of the global crude production has been effectively removed from the market. However, this can be brought back into play quite quickly.

The economic growth in the US has remained robust and as per latest estimates US GDP growth is projected at 2.1% in 2023 and 1.5% in 2024. China has been a mixed bag of contradictory numbers so far but with the removal of Covid restrictions there are increasing signs of rapidly rising energy demand. The US continues to produce 12.8/12.9 million barrels/day but the total number of oil rigs in operation has fallen by 20% between November 2022 and October 2023. The global crude oil demand is projected to rise by 2.3% in 2023 followed by at least a 1.1% growth in demand in 2024!

To add to the above backdrop; two major oil exporters, Saudi Arabia and Russia, want higher oil prices, given the robust and growing demand. The former to fund its growing budget deficits and grandiose infrastructure development plans and the latter to simply stay afloat. Thus, it is highly unlikely that OPEC+ will suddenly retreat from its already announced voluntary production cuts till end 2023. The prevailing voluntary production curtailment would likely continue well into 2024. Even so, the markets have not pushed Brent much beyond the $ 95 threshold because the markets are acutely aware of geopolitical uncertainties, mixed messaging from China and the fact that OPEC+ has the ability to quickly bring an additional 4-4.5 million barrels/day into the market!

A few months back, J P Morgan had opined that crude prices could reach the $150/barrel level by 2026. They have backed down from that estimate since. However, there is growing consensus building around the view that, barring a loosening of the voluntary production cuts post December 2023 by OPEC+; oil prices are expected to continue the current upward trend and could average above $100/barrel over the coming six months or so!

The oil PSUs have silently absorbed the crude price rise in the third quarter of 2023 and the price of the two most sensitive products, Petrol and Diesel have remained the same during this period. In fact, LPG prices have been reduced recently. India is in the midst of important State Elections followed by the General Elections in May 2024. Passing on the increase in input cost to domestic consumers of Petrol, Diesel, LPG, SKO and Naphtha is highly unlikely till after the elections.

Every $10/barrel increase in the average cost of the Indian Crude Basket increase the input cost for domestic consumption of petroleum products by around Rs. 1500 billion over a twelve-month period. A $10/barrel increase in the Indian Crude Basket is a reasonable assumption for the 12-month period starting June 2023 when crude prices started rising. How much of this increase will be recovered from price increases in non-sensitive products sold domestically cannot be estimated. The Central Government could also bear some of the burden by reducing Central levies and taxes, thereby creating room to raise refinery gate prices, without burdening the consumer. Funding the ultimate losses of the Oil PSUs would further increase the cost of not passing the crude oil price increase to the consumer at least till after the elections in May 2024. The current account deficit that had shown marked improvement in the first half of FY2023-24 has already started rising from recent lows.

In the end analysis, one way or another, the tax payer will pay for the increase in crude price. This drags down savings available for economic growth. Relative to capacity to pay Indians pay the highest prices in the world for all primary and secondary energy. This is so because of the taxes levied on energy by both the Centre and the States. Rationalising energy prices to reflect global energy prices, duly adjusted for capacity to pay, and eliminating high/arbitrary taxation by bringing them under GST are potential solutions for the long-term health of the oil PSUs. Will any Government go down that path? Only time will tell. But until then the oil PSUs must live with the boom and bust cycles that they have endured over more than 5 decades.



To download the latest issue 'Volume 30 Issue 22 - February 25, 2024', click here
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