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Energy: Oil firms, FM squirms - Views on News from Equitymaster
 
 
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  • Mar 20, 2002

    Energy: Oil firms, FM squirms

    While the Government can be complemented for getting the ball rolling on second-generation reforms, one could expect more discretion while building forecasts. From the next fiscal starting April 1, 2002, the administered pricing (APM) in the petroleum sector stands dismantled. Also, private sector entry has been permitted in the marketing segment.

    As per the original schedule, on dismantling of the APM, subsidy on kerosene and LPG were to be reduced to 33% and 15% respectively of international parity prices. The subsidy element, anticipated in the region of Rs 90 bn, was to be transferred to the general budget and the oil pool account would become redundant. These estimates, however, were based on crude prices of $20/ barrel. Even before start of the new fiscal, the Finance Minister's estimates are seeming to be thrown out of gear. Oil markets have firmed up over the past fortnight with spot crude prices (Brent blend) rising to $25/ barrel. The Government has yet to establish a regulator and put in place a mechanism for linking domestic fuels to international markets. As per reports, the industry is contemplating linking fuel prices on a monthly cycle.

    Although the first two quarters of the calendar year coincide with a seasonal decline in oil demand, over the current quarter, oil prices have put on 20% compared to prices in early January '02. The Organisation of Petroleum Exporting Countries (OPEC), at the start of the year, withdrew 1.5 m barrel per day (mbd) from the markets. This move, though suspected by many, was supported by non-OPEC producers (Russia, Mexico, Norway and Oman), which on aggregate basis pulled out 452,000 barrels/ day from the markets. Over the past 15 months, the OPEC has closed taps to the tune of 5 mbd. But due to non-compliance to quotas, industry watchers estimate the cut at 4 mbd.

    Over the past quarter, the lower production has coincided with a revival in the global economy led by the largest oil-consuming nation, U.S. Consequently, inventories are depleting, as demand for fuel rises with a pick up in industrial & commercial activity. Further, speculation of U.S military action against rouge state, Iraq, has fueled the bullish undertone.

    In a recent meeting, the OPEC decided to run its wells at current production levels till the end of June. The cartel, at present, seems more interested in maintaining crude oil at preferred prices rather than fighting for market share. Futures have strengthened on this count, as the U.S economy enters the high petrol consuming summer months. Offering some respite are non-OPEC producers, which have not indicated production plans for the next quarter. In fact, as per reports, Russia, the second largest oil producers, is expected to increase production for the rest of the year.

    Going forward much will depend on the slope of the recovery. Few economists are anticipating U.S to clock GDP growth of 5% in the first quarter. With the cartel comfortable with current market dynamics, runaway growth could result in heating up of oil markets. With 'oil' not well the FM could not be doing too well either. Will higher petroleum prices be passed on to the consumer or will the FM compromise on the fisc?

     

     

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