March 9 was crude oil's Black Monday as Saudi Arabia upped the ante when Russia refused to reduce oil production as global oil demand fell with the coronavirus outbreak. It led to the steepest fall in crude oil prices - it crashed $14.25, down 31.5 per cent - to $31.02 a barrel. That's been the sharpest fall in crude oil prices since the start of the 1991 Gulf War.
The three-year pact between the Organisation of Petroleum Exporting Countries (OPEC) and Russia, called OPEC+, became invalid after Moscow refused to support deeper oil cuts. At $30 per barrel, crude oil is now priced at nearly half the average global benchmark price of over $60 per barrel during the last two years.
The steep fall in crude oil prices is a bonanza for the large Asian economies - China, India and Japan - that import the bulk of their oil needs and already facing a slowdown, are also feeling the impact of Covid-19 pandemic.
The India basket of crude is currently at $34.70 against an average of $65.52 in December. However, since Indian oil companies have already made provisions for March, the benefits will show only in the next fiscal. A $10 per barrel (bbl) decline in crude prices translates into a saving of $15 billion (Rs 1.1 lakh crore at Rs 73.81 to a dollar) to the country's net oil import bill. If crude remains subdued in the $30 range, the potential import bill savings could be to the tune of $40-45 billion (Rs 3-3.3 lakh crore). However, till now (March 12) petrol prices have been lowered by Rs 2.15 a litre and diesel by Rs 2.16 since the big crash.
During the first 10 months of 2019/20, India imported 188.45 million tonnes of crude oil valued at Rs 6.17 lakh crore ($87.7 billion) as opposed to 226.5 million tonnes worth Rs 6.66 lakh crore ($95.27 billion) during 2018/19.
At a time when global crude prices are falling, the government increased the excise duty on petrol and diesel by Rs 3 each, the steepest increase in eight years, on March 13. While that did not lead to an increase in prices for consumers, it could fetch the government an additional Rs 43,000 crore in a year, which could help it meet the FY2021 fiscal deficit target. As far as this fiscal is concerned, the immediate impact would be raising an additional Rs 2,120 crore. Post the excise duty hike, out of Rs 69.59 for a litre of petrol in Delhi on March 16, Rs 41.31 (59 per cent) is accounted for by excise duty (Rs 22.98), VAT (Rs 15.25) and dealer commission (Rs 3.55).
"If global crude oil prices continue at the current level in the longer term, prices of petrol and diesel could drop by Rs 10-12 per litre in India, if government decides to pass on the benefit to people instead of helping oil marketing companies improve their profits and increase revenue to the exchequer", says Deepak Mahurkar, Partner and Leader, Oil & Gas, PricewaterhouseCoopers (PwC).
Crude prices have rebounded, along with equities and other global financial markets, lifted by hopes that US producers will cut output and the US may come up with a stimulus package to fight the corona-inflicted slowdown. However, experts say it is unlikely OPEC and Russia will again stitch a pact to control oil prices.
Who All Will Benefit
Ravichandran notes that since India is 85 per cent dependent on imported oil, the crash can lower the Current Account Deficit (CAD), apart from lowering inflation. It can also reduce the subsidy burden on the government for petroleum products. The CAD was 0.9 per cent of the gross domestic product (GDP) at $6.3 billion in the quarter ended September 2019. If crude oil prices fall $10 per barrel, the general assumption is that it could translate a reduction of 0.25 per cent of the country's CAD and dependence on foreign fund inflows. Similarly, the rising inflation could contain as a fall of $10 per barrel is estimated to reduce the wholesale consumer price index by 0.5 per cent. This in turn can result in reduction of lending rates by the RBI and help improve general spending, estimate experts.
"Lower oil prices should benefit oil marketing companies as higher product demand results in gross refining margin uptick, fuel and loss costs drop, working capital release, ability to raise marketing margins rise and sales volume recover," says analyst Sabri Hazarika of Emkay Global.
Other long-term gainers from this mayhem include downstream users of petroleum products like chemicals, fertilisers, paints, tyres, airlines, lubricants and soaps & detergents, says Ravichandran of ICRA. Besides, raw material costs and logistic expenses of the industry will come down to help revival of the economy, notes Mahurkar.
However, while oil marketing companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum can cheer the crude price crash, most oil and gas players are going to be affected, especially those in the upstream business, especially the Gas Authority of India (GAIL), says the Emkay analyst.
Upstream players like ONGC and Oil India are obvious losers as oil realisations are going to drop 20 per cent in FY21, while H2 APM (administrative gas prices which are pre-determined and fixed) can see further downsides after a 25-30 per cent fall expected in H1. GAIL's liquid natural gas (LNG) portfolio, in which pricing is oil-linked but sourcing mixed (with US LNG being linked to the natural gas bench mark Henry Hub and $5 per mmbtu - Million Metric British Thermal Units, of fixed component), should see a hit on margins, coupled with decline in LPG realisations. Other gas utilities could also see adverse gas-to-oil economics which can affect demand. RIL Chairman Mukesh Ambani had lost $5.6 billion in networth on the day of the big fall in share prices of the company.
Ravichandran says oil exploration and production (E&P) companies and export-oriented companies in textiles, gems and jewellery, plantation crops and granites could be impacted as weak crude prices drive the global economy to lesser demand.
Will the Crash Sustain?
"I doubt", says Deepak Mahurkar, citing the global economy is in strain and efforts are on to pullback the downslide.
However, recoveries so far are way below the 30 per cent plus crash. A note from Goldman Sachs has already cut its second- and third-quarter Brent price forecasts to $30 per barrel, citing low probability of an immediate OPEC+ agreement with Russia. "Such volatility was earlier seen in 2008/09 and in 2014 and 2016. The recovery now hinges on the alliance coming back, US output peaking out or declining, global economic recovery and an economic stimulus", says Hazarika. Emkay estimates Brent crude prices to hover around $50/55 per barrel in FY21/22.
But all said, the crude price fall has come as a blessing for the Indian economy that apart from being in a slowdown was also buffeted by the global coronavirus scare.
@pb_pbjayan