Crude oil prices to stabilise over next 4-6 quarters: Report

Crude oil crash is creating several headwinds for both upstream and downstream companies, a report said expecting prices to to stabilise over the next four-six quarters given the shape of the global economy.

While the global economy is projected to contract 3 per cent this year, the domestic economy is forecast to stall completely, though may stave off contraction, according to many analysts.

India, the third largest fuel consumer and importer, is under a seven-week COVID-19 lockdown ending on May 17, has seen demand almost halving during the national shuttering, while the global demand crimped by 30 per cent in April, when almost the whole world was under lockdowns.

The prices fell also because crude has been in substantial oversupply since February.

According to an analysis by domestic rating agency Icra, Brent crude is likely to trade in the range of USD 20 to USD 40 a barrel in the medium term or till the COVID-19 infections abate, as the world is fearing a second wave of the pandemic from next winter.

"Brent may trade in a band of USD 20 to USD 40 a barrel until the COVID-19 fears abate, with intermittent volatility depending on news flow, Icra told a webinar Tuesday.

The plunge in global crude prices -- down from USD 77 a barrel early January to mid-USD 20s now -- is highly credit negative for domestic upstream players, while refining and marketing companies and gas utilities also face several headwinds.

Profitability of the downstream sector will also be impacted by lower gross refining margins (GRMs) as the pandemic has eroded demand for refined fuel thereby weighing on crack spreads with gasoline and ATF spreads being the worst hit.

While ATF demand fell 94 per cent in April, petrol intake plunged 64 per cent, forcing refineries to run at around 40 per cent of their capacity as the lockdown has stopped all traffic.

According to K Ravichandran, a senior vice-president at Icra, the sharp drop in crude prices is credit negative for the upstream sector as their realisations and cash accruals will decline meaningfully. Additionally, gas prices at various international gas hubs have declined, which will lead to lower domestic gas prices in FY21.

Accordingly, domestic gas production will remain a loss-making proposition for most fields for upstream producers, notwithstanding some decline in oilfield services/equipment cost, he warns.

He further said unless the upstream industry gets some reliefs from government by way of reduction in fiscal levies (royalty, cess, profit petroleum) and changes in gas pricing formula to provide for certain level of floor price and/or removal of ceiling on prices for the deepwater/complex fields, their credit metrics will weaken materially in the near term.

When asked about the likely inventory loss in Q1 for OMCs, having already suffered a Rs 33,000 crore hit in the March quarter, he said the ongoing quarter should not be bad for them in terms of inventories as they have been managing it well since March.

Currently, domestic refineries are running under 50 per cent operating capacity owing to the decline in demand and the gap may improve as the lockdown is lifted.