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India could gain INR 88,800 cr this year form weak crude oil

The country is set to save INR 88,800 crore this financial year, thanks to a drop in the price of the Indian basket of crude oil to a six-month low of USD 49.11 a barrel. The crude oil price decline has mainly been on account of higher drilling activity and stockpile in the US, a strong dollar, an ailing Chinese economy, and the prospect of Iran boosting production after sanctions on the country were lifted recently.



The Indian basket represents the average price of Oman and Dubai sour-grade and sweet Brent crude oil processed in Indian refineries. The current price of the Indian basket is the lowest since 30 January, when it stood at USD 46.28 a barrel. Between April 1 and August 6 this year, the price has averaged at USD 58 a barrel.



Mr K Ravichandran, senior vice-president at research & ratings agency Icra, said that “The government had budgeted for an average crude oil price of USD 70 a barrel for this financial year. If the average price of USD 58 a barrel is sustained for the rest of the year, it will lead to a saving of INR 78,000 crore in companies’ import bill, and of around INR 10,800 crore in the government’s subsidy bill.”



At present, every USD 1 fall in crude oil prices brings import bill down by INR 6,500 crore, and the government’s subsidy burden is reduced by INR 900 crore. However, the benefit is limited by the ongoing depreciation in the rupee’s value. The rupee has weakened by 74 paise, or 1.17%, against the dollar in the past three weeks. Currently, every INR 1 increase in the dollar exchange rate increases oil import bill by INR 7,455 crore, according to Petroleum Planning and Analysis Cell, an arm of the petroleum ministry.



The decline in crude oil prices is positive for Indian refiners, those of Indian Oil Corp, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd, as their working-capital requirements would come down. Product prices and gross underrecoveries, losses on account of selling petroleum products like liquefied petroleum gas (LPG) and kerosene below market price would also come down.



Mr B Ashok, IOC Chairman, said that “The current subdued crude price is likely to continue for the next couple of years, owing to higher US shale production, Organization of Petroleum Exporting Countries’ insistence on not cutting production, and possibility of more oil from Iran. For us, it is a definite winning proposition.”



These gains, however, could be limited by inventory losses. IOC had to suffer INR 15,000 crore of inventory losses last financial year.



Lower underrecoveries for refiners would also mean reduced subsidy-sharing for upstream companies like Oil and Natural Gas Corp. The government has already exempted upstream firms from subsidy-sharing for LPG and limited the burden on kerosene by offering INR 12 a litre.

Source : BUSINESS STANDARD

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