Prices of Brent crude, an important benchmark, softened from $108.47 per barrel on 31 December to around $101 currently on account of higher supplies from non-Opec (Organization of the Petroleum Exporting Countries) members and weakening demand. The strengthening dollar and concerns on Europe, too, contributed to the downward trend in prices.
For India, lower crude oil prices are definitely a positive, given the country’s heavy dependence on imports. Lower oil prices help in easing India’s high fiscal deficit, current account deficit (CAD) and sticky inflation. In the December quarter, India’s CAD stood at a record high of 6.7% of its gross domestic product. Of course, falling gold prices will also help the CAD position to an extent, which would eventually strengthen the rupee.
Further, decline in fuel subsidy will offer some relief to India’s high fiscal deficit. An improvement in the shortfall will mean that rating agencies will take it as a positive sign. Moreover, lower crude oil prices will have a positive impact on inflation. All this will be important to reduce banks’ lending rates and boost growth.
Decline in crude oil prices will help reduce the losses on selling fuel below cost. A combination of partial deregulation and decline in international oil prices anyway has led to a fall in diesel losses to Rs.6.50 a litre in the past fortnight (for which figures are available), the lowest in 18 months. Companies that could potentially benefit from lower losses are state-run upstream companies sharing the subsidy burden such as Oil and Natural Gas Corp. Ltd (ONGC), Oil India Ltd (OIL) and GAIL (India) Ltd. ONGC’s and OIL’s gross price realization will come down in line with the decline in crude prices. But the net realizations would be more important and how they would be affected will depend on the subsidy-sharing proportion, which is uncertain.
For oil marketers—Hindustan Petroleum Corp. Ltd, Bharat Petroleum Corp. Ltd and Indian Oil Corp. Ltd—profitability will depend on the compensation they receive from the government and upstream companies.
Will lower crude prices be sustained? Global oil demand is expected to remain subdued this year mainly due to a slowdown in the euro zone. The International Energy Agency (IEA) recently said 2013 will be the third consecutive year of weak growth in demand.
“Relatively strong demand growth among non-OECD (Organisation for Economic Co-operation and Development) countries of 1.28 million barrels per day (mbpd) will be tempered by a contraction of 480 kbpd (thousand barrels per day) in OECD consumption, particularly in Europe, where it will shrink by 340 kbpd. European demand has not been this weak since 1985,” IEA said.
“The April Oil Market Report’s estimate of total global demand for the year remains broadly unchanged from the March report’s 90.6 mbpd,” it added.
IEA also said non-Opec supply growth, particularly in North America, is expected to keep pace with world liquid fuels consumption growth and contribute to modest declines in world crude oil prices.
