Weak crude oil may bring Rs 88,800-cr gains this year

Indian basket at 6-month low of $49.11 a bbl

The country is set to save Rs 88,800 crore (Rs 880 billion) this financial year, thanks to a drop in the price of the Indian basket of crude oil to a six-month low of $49.11 a barrel. The crude oil price decline has mainly been on account of higher drilling activity and stockpile in the US, a strong dollar, an ailing Chinese economy, and the prospect of Iran boosting production after sanctions on the country were lifted recently.

The Indian basket represents the average price of Oman and Dubai sour-grade and sweet Brent crude oil processed in Indian refineries (in the ratio of 72:28). The current price of the Indian basket is the lowest since 30 January, when it stood at $46.28 a barrel. Between April 1 and August 6 this year, the price has averaged at $58 a barrel.

“The government had budgeted for an average crude oil price of $70 a barrel for this financial year. If the average price of $58 a barrel is sustained for the rest of the year, it will lead to a saving of Rs 78,000 crore (Rs 780 billion) in companies’ import bill, and of around Rs 10,800 crore (Rs 108 billion) in the government’s subsidy bill,” said K Ravichandran, senior vice-president at research & ratings agency Icra.

At present, every $1 fall in crude oil prices brings import bill down by Rs 6,500 crore (Rs 65 billion), and the government’s subsidy burden is reduced by Rs 900 crore (Rs 9 billion). However, the benefit is limited by the ongoing depreciation in the rupee’s value. The rupee has weakened by 74 paise, or 1.17 per cent, against the dollar in the past three weeks. Currently, every Rs 1 increase in the dollar exchange rate increases oil import bill by Rs 7,455 crore (Rs 74.55 billion), according to Petroleum Planning and Analysis Cell (PPAC), an arm of the petroleum ministry.

The decline in crude oil prices is positive for Indian refiners - those of Indian Oil Corp (IOC), Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) - as their working-capital requirements would come down. Product prices and gross underrecoveries (GURs) - losses on account of selling petroleum products like liquefied petroleum gas (LPG) and kerosene below market price - would also come down.

“The current subdued crude price is likely to continue for the next couple of years, owing to higher US shale production, Organization of Petroleum Exporting Countries’ (OPEC’s) insistence on not cutting production, and possibility of more oil from Iran. For us, it is a definite winning proposition,” IOC Chairman B Ashok told Business Standard. These gains, however, could be limited by inventory losses. IOC had to suffer Rs 15,000 crore of inventory losses last financial year.

Lower underrecoveries for refiners would also mean reduced subsidy-sharing for upstream companies like Oil and Natural Gas Corp (ONGC). The government has already exempted upstream firms from subsidy-sharing for LPG and limited the burden on kerosene by offering Rs 12 a litre (anything above that level is borne by the upstream companies.

The OMCs’ underrecoveries came down from Rs 139,869 crore (Rs 1,398.69 billion) in 2013-14 to Rs 72,314 crore (Rs 723.14 billion) last financial year, thanks to a deregulation of the diesel price and rollout of the direct benefits transfer scheme for LPG (DBTL).

In the current financial year, the government is budgeting for a petroleum subsidy bill of Rs 30,000 crore (Rs 300 billion), including Rs 22,000 crore (Rs 220 billion) on LPG sales and the rest on kerosene. The government might now be able to save Rs 10,800 crore (Rs 108 billion) of this from the decline in crude oil rates.

India imported 189 million tonnes of crude oil for $112 billion last financial year (2014-15). With the decline in crude oil prices, a Rs 78,000-crore (Rs 780 billion) cushion is expected to be created for importers, OMCs could pass on the benefit to consumers by reducing the retail prices of petrol and diesel.