CRISIL analysis: Crude oil prices may soften on lower risk premium

As 2024 winds up and 2025 dawns, there is a semblance of stability in the global oil market. Oil prices are expected to soften in the year ahead as supply-demand dynamics continue to hold sway. 

While production adjustments by the Organization of the Petroleum Exporting Countries (OPEC) will decide the flow, growth prospects of major consumer economies, particularly China, will shape demand.  

Prices could stabilise in the $70 to $75 per barrel range if OPEC reverses supply cuts even as demand growth in large economies moderates and geopolitical uncertainties do not aggravate. On the other hand, in calendar 2024, the average price was estimated to be $80 to $82 per barrel. The year saw some fluctuations, with prices rising to $90 per barrel in April because of uncertainties in West Asia and production adjustments by OPEC+ (a grouping of OPEC and 10 other oil producers). 

Amid the shifting sands of geopolitics, Russia remained India’s top crude oil supplier accounting for 35 to 40 per cent of total imports. Discounts offered by Russia because of western sanctions made this a win-win.  

But the discounts have been progressively narrowing, so India has proactively diversified its sources, with imports from Iraq (20 per cent share), Saudi Arabia (12 per cent), and other nations (14 per cent) offsetting concentration risks and ensuring energy security.  

India’s petroleum consumption is seeing steady growth this financial year, driven primarily by the transportation and industrial segments. The former dominates with 58 to 60 per cent share. Diesel and petrol account for 53 to 55 per cent of the country’s total consumption.  

To be sure, electric vehicles (EVs) are on the ascend, but fossil fuels continue to hold sway, particularly in the commercial vehicle space where EV penetration is still under 1 per cent.  

Consumption of diesel and petrol is expected to grow 3 to 5 per cent and 1 to 3 per cent, respectively, this financial year (FY) and next, driven by rising industrial activity and mobility needs.  

Industrial demand for these fuels is rising as the Indian economy expands, with consumption by the sector expected to rise 2 to 4 per cent this FY and next. The growth should continue to tick well, driven by infrastructure expansion and rising mobility needs.  

Credit outlook 

  Operating profit of oil marketing companies (OMCs) is expected at $12 to $14 per barrel this FY, down from $20 per 

barrel last FY but higher than the 10-year average of $9 to $11 per barrel. 

Their gross refining margin (GRM) is seeing a steep correction and is likely to average $3 to $5 per barrel, with diesel spreads evening out as refineries globally have ramped up production while consumption has slowed.  

Also, discount on Russian crude oil has tapered and the impact of inventory loss has kicked in with crude oil price averaging roughly $73 per barrel currently, down from about $82 per barrel in the first half of the FY.  

That said, overall returns will be bolstered by marketing margin (net of operating expenses), which is likely to continue at the higher level of about Rs 4.5 per litre (or Rs $9 per barrel), provided there is no reduction in retail fuel prices. It could hold steady even next FY as oil prices hover at $70 to $75 per barrel. This is, however, subject to the movement in retail prices of petrol and diesel. The consequent cumulative cash accrual, estimated at Rs 52,000 to Rs 54,000 crore, will partially support its about Rs 90,000 crore capex plans for this FY, largely towards brownfield capacity expansion.  

Natural gas consumption on the rise 

  The country’s natural gas consumption is on the rise, supported by the ongoing expansion of city gas  distribution (CGD) network, increased industrial demand and a shift towards cleaner fuels.  

Overall, gas consumption is projected to grow 5 to 7 per cent this FY to 197 to 200 mmscmd. In FY26, the consumption is expected to rise 4 to 9 per cent to 203 to 212 mmscmd.  

The growth will be driven by multiple factors, including higher power sector demand to meet peak summer electricity needs, ongoing infrastructure development in the CGD sector, and stable LNG prices that are supporting demand from the refinery and petrochemical industries.  The CGD sector, in particular, is a major growth engine, as more cities are connected to the gas grid boosting investments and more households and businesses gaining access to cleaner, more cost-efficient energy. As a result, piped natural gas (PNG) consumption is forecast to grow 10 to 15 per cent through FY26. 

The use of compressed natural gas (CNG) is also expected to surge. The country’s growing CNG infrastructure is set to add 700 to 800 new CNG stations through FY25 and FY26, elevating demand by 10 to 15 per cent. The cost advantage of CNG (15 to 25 per cent cheaper than petrol) will continue to drive its adoption.  

However, a significant challenge lies in the fast-declining share of cheaper domestic gas, which has fallen from 70 to 75 per cent at the beginning of FY25 to around 40 to 45 per cent now. This implies the CGD sector will become increasingly reliant on imported LNG to meet growing demand, leading to a higher cost structure. 

As India’s import dependence grows, monitoring LNG price trends will become critical. Spot LNG prices have stabilised in CY24, averaging around $10 to $11 per mmBtu, reflecting a modest decrease on year.  

In 2025, the prices are expected to average $12 to $15 per mmBtu, driven by a surge in European demand, especially as the Russia-Ukraine gas transit deal expires.  

With the deal ending, Europe’s reliance on LNG will increase and impact global markets, though Asian demand (from countries such as Japan, South Korea, and China) will remain steady.  

Geopolitical factors, particularly the developments in West Asia, will remain a key monitorable, as any flareup can disrupt supply routes and affect price stability.