ONGC, OIL not expecting year-end windfall with recovery in crude oil prices

Topics ONGC | OIL India | Crude Oil

Domestic crude oil and natural gas prices are a reflection of the prevailing prices in the international market.
The global crude oil price recovered from the lows of 2020 this month, but is still not enough to give a much-needed windfall to oil exploration and production companies. The price also remains soft enough to allow the central and state governments to comfortably continue raking in excise and value-added tax revenues.

However, this situation may not persist if crude oil prices move up by another $5 or so and petroleum product prices also move in tandem.

Currently, Brent crude oil prices are trading at $56.01 a barrel, up from $51 a barrel on January 4 (opening day of trade), reflecting a 10 per cent rise in two weeks. This is a steep recovery from the $19.33 a barrel lows reported on April 21.

Oil exploration and production companies like Oil and Natural Gas Corporation (ONGC) and Oil India (OIL) are not expecting this price recovery to be the last moment shot-in-the-arm to salvage the difficult 2020-2021.

“We do not think this price movement is a windfall and annual earnings (for 2020-2021) will surely be much lesser than 2019-2020. The domestic oil exploration and production companies continue to make losses on natural gas. Crude oil prices have been low for most of the financial year and this will reflect in annual earnings,” an oil company representative said.

Both, domestic crude oil and natural gas prices are a reflection of the prevailing prices in the international market. While oil price movements are more immediate, gas prices are revised biannually. The present price of domestically produced natural gas is $1.79 per million British thermal units. This is a price at which exploration companies say that they sell at a loss.

“There are also some sceptics of this oil price rally driven by Saudi Arabia’s production cuts. If US President-elect Joe Biden’s administration goes soft on Iran and lifts sanctions, the oil market will be oversupplied and prices may not recover. There is a lot of geopolitical turmoil that is going to steer the oil market in 2021,” he said.

For most Indians, this movement has mostly meant more expensive petrol and diesel with prices crossing record high levels in key geographies. Petrol and diesel prices were hiked by 25 paise a litre on Thursday in New Delhi. This was the second continuous day hike after which petrol cost Rs 84.70 a litre and diesel Rs 74.88 a litre in the capital. In Mumbai, petrol cost Rs 91.32 a litre and diesel sold at Rs 81.60 per litre. These are the highest ever prices at which petrol has been sold in Delhi and diesel in Mumbai. The prices remained unchanged on Friday.

Auto fuel prices in India are revised every day by oil marketing companies (OMCs). Officially, the petrol and diesel prices are benchmarked to a comparable grade of these fuels traded in the international market. The domestic prices are determined after adjusting for currency exchange rate variations and a lag of 15 days. OMCs, however, can also refuse to adhere to this pricing methodology if they feel the international petroleum product prices are not in tandem with fundamentals.

Despite having announced that petrol and diesel prices are now market-linked, the central government has (publicly in at least one instance) asked oil companies to cut prices and absorb the higher excise duty.

“The present price point is being viewed as the threshold beyond which petrol and diesel prices cannot go up. A firming up of crude oil prices would most likely result in an excise duty rollback. The government need not wait for Budget 2021-2022 (to announce this cut). It can be done before, during or after depending on the market conditions,” an oil sector analyst told Business Standard.

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