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“Crude” Shock

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Since my previous post about a month ago, petroleum and petroleum product prices have spiked, with Brent crude touching $ 110/bbl. WTI crude is set to go past the psychological $ 100/bbl mark, on the back of political unrest in Libya and Algeria, which are oil producing countries, unlike Egypt.

The political unrest in Libya has taken a definite turn for the worse with reports of upto 1,000 protestors being killed by the Libyan Government. Muammar Gaddafi, the despotic ruler of Libya, has threatened to sabotage the country’s oil facilities. This move is aimed at sending a message to protestors that the country would be plunged into chaos if he is forced to cede power. Already, Libyan oil production is down to 75% of its normal production levels. This “sabotaging of oil wells” has a historical parallel in the 1991 Gulf war when the retreating army of Saddam Hussein was ordered to set fire to 700 oil wells in Kuwait. It took the US forces 9 whole months to extinguish the fires!

Hence, India will continue to bear the brunt of high crude prices, with increasing under recoveries for the state owned OMCs (IOCL, BPCL, HPCL). Per unit under recovery for the previous fortnight stood at ` 10.74/lit for diesel, ` 20.56/lit for kerosene and ` 356/cylinder for LPG. These figures can be revised upwards when the OMCs re-calculate their under recoveries for the current fortnight. The higher total subsidy burden will burn a deeper hole into the government’s finances, making fiscal consolidation harder.

Historically, Cairn India was the one stock which moved in tandem with crude prices. However, the uncertainty over its pending acquisition by Vedanta Plc has resulted in the stock barely budging despite crude’s surge. Government owned ONGC and OIL India have to provide higher subsidies at higher crude prices, which results in lesser sensitivity of their shares to rising prices. OMCs will be negatively affected as their raw material prices go up, whereas the product prices (diesel, kerosene, LPG) are fixed. The Government is unwilling to deregulate diesel as inflation continues to be in double digits.

With ONGC’s FPO about to hit the markets, there are expectations that the Govt. will announce some positive measures in the Budget, for example, reducing customs duty on crude to 0% and that on petrol & diesel to 2.5% which will reduce the level of under-recoveries in the system. Let’s hope that the Govt. smoothens this “crude” shock to the Indian economy.

From the desk of Deepak Darisi

Written by Fundamental Side

February 24, 2011 at 1:22 pm

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