No impact of Opec cut on India, say experts

The decision by the Organization of the Petroleum Exporting Countries' (Opec) to cut crude oil production by 1.2 million barrels per day (mbpd) is unlikely to have an impact on India's crude oil subsidy figures, say experts.

One of the largest importers of crude in the world, India has benefited highly from the low price regime. An Opec output cut might raise prices and, therefore, subsidies, is the worry.

However, experts say, a global crude oil price of $50-55 a barrel is comfortable for India. It is believed that prices are unlikely to climb above this.

"With diesel price deregulation, the only subsidy burden on the government is of LPG (cooking gas) and kerosene, expected to remain below Rs 30,000 crore in FY17. On the other hand, the sector is providing excise revenue in excess of Rs 160,000 crore to the government, a net contributor to the fiscal situation," said Debasish Mishra, partner at Deloitte Touche Tohmatsu India.

With both petrol and diesel out of the subsidy burden, under-recoveries on both domestic LPG and kerosene came down to Rs 27,571 crore in 2015-16, from Rs 76,285 crore in 2014-15. For 2016-17, the budgeted subsidy is Rs 27,000 crore.

According to the government's Petroleum Planning and Analysis Cell, under recovery on kerosene with effect from December 1 will be Rs 10.51 a litre, as against Rs 12.25 a litre in the first fortnight of October and Rs 12 in the second. Cash transfer to the customer under Direct Benefits Transfer of LPG (DBTL) will be Rs 151.29 a cylinder, of which Rs 123.17 will be cash compensation by government and Rs 28.12 by the oil marketing companies (OMCs).

"Despite the Opec deal, crude oil is likely to be within $60 a barrel in the near future. Beyond $55 a barrel, shale oil becomes viable for producers in the US, acting as a cap to crude prices. India has little to worry if the price remains in this range," Mishra added.

Also, an increase in price will be a boost for domestic exploration and production companies Oil and natural Gas Corporation, Cairn India and Oil India. "We expect inventory drawdowns and the oil market to come back into balance, pushing up prices.However, higher prices will also result in higher production from US shale, preventing prices from reaching levels last seen in 2014," said Dhaval Joshi, an analyst at Emkay Global.

From Wednesday midnight, the price of petrol rose by 13p a litre and of diesel by 12p a litre, after the rise in global prices.

With the International Energy Agency's latest forecast for global oil demand and non-Opec supply, reduction of the exporter cartel's output to 32.5 mbpd implies that 2017 demand will surpass supply by 0.8 mbpd. US production has dropped to 8.7 mbpd currently, against a peak of 9.4 mbpd, expected to improve in a higher price regime. A worry for India would be a reduction of about 600,000 bpd in production by non-Opec countries.