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Energy: Crude caution!

Mar 18, 2005

Crude oil prices reached a new peak yesterday breaching the US$ 57 per barrel mark and surpassing the recent high of US$ 55.67 per barrel in October 2004. This article gives a perspective about the impact on the import bill of our country as well as on the companies across the straddle. India's oil demand is likely to rise from the existing 2 mbpd (million barrels per day) to 2.54 mbpd in FY06. This comes to about 24.9 MMTPA (million metric tonnes per annum). In 9mFY05, the country's oil import bill has risen by nearly 42% as compared to the corresponding period last fiscal. Having said that, a look at the chart below, signifies the fact that while the volumes haven't changed by much, it is the soaring prices, which have led to the biggest hit.


* 9mFY05E annualised

From the above graph, it is evident that while the volumes have increased by 10.6% YoY during FY05, the higher import bill is largely due to the sharp rise in prices, leading to a rise of nearly 22% YoY during the said period in value terms.

Now, let us consider the impact on various Indian oil companies of the rise in crude oil prices. In FY04, crude prices, from the Indian perspective, averaged at US$ 28 per barrel, while at the current levels of US$ 57 per barrel, given the operating leverage of the upstream companies, operating margins are likely to surge. As a result, we believe that ONGC is likely to witness record profits in FY05.

While in the face of rising excise duties and freeze on product pricing, downstream oil marketing companies like HPCL, BPCL and IOC would see their profits dwindle. As per a back of the hand calculation, the rise in raw material costs (read crude oil) for oil marketing companies for refining is likely to be nearly 61% and in the event of this not being recovered by a commensurate increase in retail petrol and diesel prices, profits would be affected.

At these levels, we believe that investors should tread cautiously with regards to PSU oil companies' stocks. However, going forward, we believe that there is scope for further de-regulation in the sector (especially given the government's need to reduce deficits under the FRBM), the petroleum sector is likely to benefit. Having said that, investors have also got to be realistic with respect of 'pricing' of petroleum products, given the political compulsions.

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