Oct 1, 2004|
High crude prices: How it pans out?
In the face of rising crude oil prices and the resultant international product prices, the government has again deferred the impending petrol and diesel price hikes for the current fortnight. To put things in perspective, crude prices touched US$ 50 per barrel early this week and the Indian crude mix is worth 50% more than the price paid by the refineries in FY04.
What are the factors and how would they affect the players across the straddle? Let us now have a look at these factors:
OPEC production at the peak: Currently, OPEC accounts for nearly 35% of the crude oil consumed globally. Members in the organization have been pumping crude oil at the highest capacities. The capacities cannot be stretched significantly in the short-term.
The supply side issues: After the recent Venezuelan political turmoil, Nigeria, the fifth largest producer in the OPEC, is currently witnessing problems as militia and unions have threatened to interrupt production, thereby affecting the crude prices in the international markets. To add to this is the financial crisis being witnessed by the Russian oil giant, Yukos, which has cut exports to China, thereby adding to the scarcity premium of crude prices.
US oil inventories: Major concerns over falling US oil inventories have driven crude prices in the recent months. The world’s biggest oil consumer’s inventory plays a major role in determining crude oil prices. To put things in perspective, the last three months have witnessed falling inventories in the US and it is during this period that crude prices soared by over US$ 10 per barrel. With the winter season in sight, demand for heating oil is likely to be strong.
Developing world gulping higher than ever before: China has overtaken Japan to become the world’s second largest consumer of oil. On the other hand, India’s oil imports have increased by 16% during 1QFY05. Going forward, the consumption is likely to remain robust.
How would this affect the Indian companies?
Oil marketing companies: The recent decision by the ministry not to hike product prices is likely to result in an acute squeeze in marketing margins although refining margins remain robust. We believe although the oil marketing companies have been witnessing high refining margins, subsidies on LPG and kerosene is likely to increase, as the product prices move in tandem with international prices. As per our calculations, oil-marketing companies currently face under-recoveries of Rs 96 per cylinder of LPG and over Rs 6 per litre of kerosene. As a result, subsidies are likely to create a further dent in the bottomline of these companies.
Refining companies: Oil refining majors have had a dream run during the current fiscal as a result of firm product prices. Although the government reduced customs duties, product prices continue to remain firm, resulting in high margins. To put things in perspective, IOC is expected to witness refining margins of over US$ 8 per barrel for 2QFY05. As a result, integrated downstream majors such as IOC, HPCL and BPCL shall be compensated for the fall in marketing margins.
Upstream majors: Upstream majors such as ONGC and OIL India are likely to witness a major jump in revenues during the current fiscal, riding on the back of high product prices. To put things in perspective, every US$ 1 per barrel adds Rs 9 bn to ONGC’s revenues resulting in higher margins as major costs are fixed. Also, crude prices are hovering at nearly US$ 43 to US$ 44 per barrel (in the Indian context) as against US$ 29 per barrel for FY04. We believe although the government’s decision to pass on additional subsidy burden on these majors would result in loss in profits, the bottomline is still likely to be significantly higher as compared to FY04.
All in all, we believe that the global crude prices are likely to soften from the current high of US$ 50 per barrel thereby giving some room for marketing margins to the oil companies. Add to this the fact that private competition is likely to help further de-regulation, thereby reducing government interference. At the current juncture, we believe investors should be selective in their stock pickings in this sector, as concerns over subsidies and crude prices loom large.
More Views on News
Mar 27, 2017
GAIL (India) Ltd has announced results for the quarter ended December 2016. reported 9.4% year on year (YoY) decline in sales, while bottom-line grew 45.4% YoY.
Mar 17, 2017
ONGC has announced results for the quarter ended December 2016. The company has reported 9.2 % year on year (YoY) growth in sales, while bottom-line grew 197% YoY.
Jan 24, 2017
Oil India Limited announced results for the quarter ended September 2016. The company has reported an 6.5% and 7.8% Year on Year (YoY) decline in sales and net profit respectively during the quarter.
Dec 3, 2016
GAIL (India) Ltd has announced results for the quarter ended September 2016. The company has reported 16 % year on year (YoY) decline in sales, while bottom-line grew 180% YoY.
Nov 3, 2016
ONGC has announced results for the quarter ended September 2016. The company has reported 10.3 % year on year (YoY) decline in sales, while bottom-line grew 6.3% YoY.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407