Surge in crude oil prices could hit demand, margins of downstream players and consumers: ICRA

Crude oil prices (Brent) have increased by 34 percent to USD 64.3/bbl in early Nov 2017 from USD 48.0/bbl in Nov 2016 - end when the Organization of the Petroleum Exporting Countries (OPEC) had decided to cut back on crude oil production, according to a report by ICRA.

Notably, over the past two months, crude oil prices have increased by 22 percent from USD 52.3/bbl in August-end.

The increase can primarily be attributed to geo-political tensions, expectations of extension of timeline for production cut back by OPEC and few non-OPEC countries and the recent higher-than-anticipated global demand growth of petroleum products.

As per ICRA, the recent run up in crude prices, if sustained will have modest impact on macro economy besides the other stakeholders.

"The profitability of upstream companies will improve following the rise in crude oil prices. As per ICRA's estimates, till an Indian Basket crude price of USD 65/bbl, the PSU upstream companies may not have to bear material under-recoveries," said senior vice-president and group head, Corporate Ratings, ICRA, K. Ravichandran.

"The PSU upstream companies continued with their capital expenditure (capex) plans even in low crude oil price scenario. However, the private E&P companies had scaled down their capex plans due to soft crude oil prices. Higher crude oil prices, if sustained, will lead to an increase in capex by the private players too," added Ravichandran.

He added that GRMs are expected to moderate over the medium term due to global refinery capacity additions, net of closures exceeding demand growth.

However, significant increase in crude oil prices has the potential to slow down global demand growth, which could also adversely impact global crack spreads.

Besides, higher crude oil prices would also test the GoI's resolve to keep prices of auto-fuels at market-determined levels.

Higher petroleum product prices are expected to modestly impact the demand growth of petroleum products over the near to medium term.

Industrial consumers may face pressure on the profitability with rise in input prices of crude derivatives besides possible increase in power and fuel cost.

The retail consumers will face increase in inflation driven by higher transportation and logistics cost.

According to ICRA's estimates, for every USD 1/bbl rise in Indian basket crude price, annual GURs will increase by Rs. 10 billion and net import bill by USD 1.2 billion.

Hence, further increase in GURs in ensuing years could increase pressure on the GoI to increase subsidy allocation for the petroleum products.

Besides, rise in crude oil prices would also push up inflation; however, the pace of transmission of crude oil price movements into prices of mineral fuels and subsequently into fares has a differential impact on WPI and CPI inflation.