Crude oil prices: Reaching a boiling point?

Unless the government compensates OMCs with cash or oil bonds, expect their profitability to get impacted.

US crude oil futures edged down on Tuesday after hitting an 8-week high of $82 a barrel on Monday. The past one month has seen crude oil prices rise over 12 per cent to touch the recent high. “The movement is based more on expectations of a global economic recovery, rather than the recovery itself. A move towards the higher end of the range will see a drop in demand, and thus, prices will begin to recede,” says Saeed Jaffery, analyst, Ambit Capital. Analysts expect the prices to range $75-$85 a barrel in the next one year.

A strengthening dollar is also a cause for concern. The US Dollar Index moved up nearly a per cent during the last month. A stronger US currency makes the dollar-denominated oil more expensive for buyers holding other currencies. Indian companies, too, will feel the heat, as the country imports nearly 70 per cent of its oil requirements. Crude oil imports surged 17.8 per cent year-on-year in January 2010 to 2.92 million barrels per day.

At an average price of $68 a barrel, the under-recoveries for oil marketing companies (OMCs like HPCL, BPCL and IOC) are pegged at Rs 43,000 crore for 2009-10 and at Rs 62,000 crore in 2010-11 with average price at $75 a barrel.

A small respite for OMCs, though, came in the form of the rupee’s 2.5 per cent appreciation against the dollar in the last one month. A bigger respite, however, would come if the prices of petrol and diesel, as suggested in the Kirit Parikh committee, are increased. But, since the government has faced stiff opposition after it raised duties on these fuels in the Budget, another rise may be a few months away. Thus, unless the government compensates OMCs with cash or oil bonds, the profitability of these companies may get impacted. The markets have been swift to sense this. Stocks of OMCs have fallen 5-8 per cent in the last fortnight, as against the Sensex’s 5 per cent rise.

With contributions from Puneet Wadhwa and Ram Prasad Sahu