Oil prices have hit a two year high with Brent breaching $70/bbl mark owing to vaccination led optimism on fuel demand as the summer driving season of the United States commences. Additionally, inventory levels have been lower than their 5 years averages even as OPEC+ reaffirmed its current plan to gradually increase production in July by 840,000 barrel/day. A robust recovery in the U.S. and Europe have provided a boost to the prices, despite the prospect of more supply from Iran should a nuclear deal be revived.
Giving more insight on the impact on domestic companies, Mr Sabyasachi Majumdar, Group Head & Senior Vice President at ICRA said, “The impact of the crude oil price surge on oil public sector companies is expected to be mixed. An improvement in the GRMS is expected owing to increasing demand. However, with the retail auto fuel prices already at historic highs the oil marketing companies may be forced to cut the marketing margins.
The central and state taxes make up for about 60% of the retail selling price of petrol and about 54% of diesel. Centre levies Rs 32.90/litre of excise duty on petrol and Rs. 31.80/litre on diesel. Unless the Centre and State governments cut the excise and VAT rates PSU OMC would be constrained in passing on further price hikes in the retail market. This is owing to the already high prices and a backlash from consumers. Accordingly, the marketing margins of PSU oil marketing companies may be adversely impacted.”
The crude oil prices increase could be reversed as the U.S. and Iran are negotiating a deal to restore the terms of the 2015 nuclear agreement, post which Iran plans to rapidly increase its crude oil production. However, OPEC+ anticipates that crude oil demand could surpass 99 million barrels per day (mbd) by Q4 CY2021 which could accommodate the return of Iranian barrels. OPEC+ projects oil demand to grow by about 6 mbd in CY2021 to an average of 96.5 mbd in CY2021, an increase of 6.6% over CY2020.
Additionally, Western oil companies are under increasing pressure to comply with climate goals and cut emissions which could increase capital costs and constrain production going forward. A rapidly accelerated energy transition as demanded by a variety of stakeholders, will require Western companies to shift businesses away from oil production. With supply in check from Western oil companies, OPEC+ could see new space to increase production while maintaining oil prices at relatively high levels.
Additionally domestic consumption of MS and HSD de-grew by 8% and 13% respectively in April 2021; ICRA estimates the M-o-M de-growth to be sharper at about 20-25% in May 2021 owing to the impact of the second wave of Covid-19 and lockdowns imposed by several states. Accordingly, Asian refinery margins had also declined in May 2021 owing to the resurgence of Covid-19 infections and the consequent slump in fuel demand. However, margins have started strengthening and are expected to improve further as an increasing proportion of the population is vaccinated and fuel demand recovers.
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