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Our affair with the oil pool - Views on News from Equitymaster
 
 
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  • Jun 6, 2000

    Our affair with the oil pool

    The firmness in crude prices highlights once again the importance of an aggressive oil self-sufficiency policy. The oil pool account (OPA) deficit is expected to reach Rs 120 bn by the end of FY01 if the prices of crude continue to remain at current levels of $25/bbl.

    There however seems to be no respite foreseeable in the near future for the OPA, any which way the scenario does not look favourable for India. Mr. Rodriguez, president of the OPEC has recently announced a price band policy for crude oil. OPEC will make adjustments in crude oil production by 500,000 barrels/day only if the 20 day moving average (DMA) fluctuates beyond the range of $22-$28/bbl.

    Even in the case of prices softening to $22/bbl the OPA will show a deficit of Rs 60 bn at the beginning of FY02. However, should the prices remain firm at levels beyond $25/bbl the deficit will increase to more than Rs 130 bn by the end of the current fiscal. Unfortunately, the latter scenario seems more likely. Oil futures for July on the New York Mercantile Exchange (NYMEX) are trading at levels above $30/bbl, which is an indication of future spot prices. The demand for oil in Asia is growing at rates more than expected and demand for petrol in America is expected to pick up with the on set of summer. In fact, American authorities have announced a draw down in stocks which has helped harden the prices of crude.

    Due to the above mentioned factors the prices of crude are expected to remain firm for the first half of FY01. Consequently, it will adversely affect the OPA, though may put added pressure on the Government to dismantle the administered pricing mechanism (APM) before the scheduled date. One possible solution could be for the Government to hasten the process of allocating the oil & gas exploration fields. We may then not be subjected to worry about future oil shocks.

     

     

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