How $100 crude oil affects Indian cos

[K.Karthik Raja]

How $100 crude oil affects Indian cos


Crude at $100 per barrel is going to have an adverse impact on
marketing companies, especially if you look at the product price under
recoveries which are going on. Petroleum has an under recovery of
nearly Rs 9.5, diesel Rs 11.3, LPG Rs 380 per cylinder, and kerosene
Rs 21. So, that is a huge under recovery burden which the industry is
carrying as of now. This includes marketing, which has to be shared
equally between marketing companies, upstream companies, and the
government.

At the beginning of the year, the government has approved nearly Rs
24,000 (Rs 240 billion) crore in oil bonds. They have issued Rs 12,000
crore (Rs 120 billion) for Q1 and Q2, and the remaining has to be
issued to oil marketing companies. In the first half of the year, when
oil bonds were issued to companies, oil-marketing companies took the
biggest hit in terms of sharing of subsidy while the burden for
upstream companies was much lower.

It is likely that in the second half of the year, the burden may shift
to upstream companies. This means companies like ONGC [Get Quote] and
Oil India might be hit because of this additional burden which they
might have to take because of crude going to $100 per barrel.

The Indian crude basket is trading at $92.29 per barrel, which is its
all-time high. This is the highest since November 26, when the Indian
basket was trading at $92.13 per barrel.

The average for FY08 comes to around $74.58 per barrel. Compared to
FY07, the average was around $62.46 per barrel. This is an about $12
increase in the Indian basket of crude. So, that impact which will be
there.

The subsidy burden will be shared in FY08 was estimated at around Rs
54,900 crore (Rs 549 billion). That is expected to touch nearly Rs
60,000 crore (Rs 600 billion). Upstream companies were bearing a
burden of nearly Rs 18,000 crore (Rs 180 billion). This burden is
expected to go over Rs 20,000 crore (Rs 200 billion). According to
ONGC's chairman, the company expects their burden to go over Rs 20,000
crore in FY08. This basically means that ONGC will have to bear a
major chunk of that burden for upstream companies.

On whether there will be a fuel price hike or a duty cut?

It is a political decision, which the government has to take. If you
look at the last few elections, the Congress has not fared well in
those two elections. It has been sending feelers to Left parties
asking for a fuel price hike. The Left has been very reluctant in
allowing that, so it is a question of how much the Finance Ministry is
able to cut duties.

The most important question is how much of the burden could be pass
onto the consumer? Since February last year, there has not been any
fuel price revision. Even in February, prices were reduced and not
increased, so the revision upward has not happened for the last 8-10
months. Now, the big question is will the government pass on some
burden to the consumer?

Last year, crude was trading at $70 per barrel in May, $80 per barrel
in September, and $90 per barrel in November. It went as high as
$99.29 per barrel in November, only to retreat later. It close the day
at $96 per barrel but $100 per barrel it was. It did it yesterday in
one physical lot. It was a 60 per cent gain, if you see over 2007. But
the jury is still out on what kind of returns you will get today?

A lot of factors were at play yesterday which pushed crude above the
$100 per barrel mark. First, the Nigerian geopolitical situation which
came to the fore. Add to it what happened in Pakistan last week. Also,
the biggest factor remains a weak dollar on the back of yesterday's
ISM data, which was the lowest in the past 10 years.

Specifically, we will be watching the two data points. One is the
factory orders data which comes out today. We are expecting it to come
at 0.5 per cent. If it comes below that, again the dollar is going to
get thrashed and because of that crude is going to gain out of it.

Second, we would be watching out for the Department of Energy's
inventory data, which is likely to come tomorrow. It is the sixth week
running where one saw a dip in reserves. This is the one which is
creating the tension in the crude market right now, over and above the
weak dollar.

We are expecting a further fall of 3.5 million barrels. This is in
contrast to the 3.3 million barrels, which stood at 293.6 barrels.
That is the strategic reserve or inventory levels that they have. Over
and above this, the White House has come in and made some noise that
they are not looking at opening out their strategic reserves to bring
the price down. Now, we will be waiting and watching for what kind of
statements does OPEC make. The next OPEC meeting is on February 1, so
there is a lot for crude to play.

In international crude, the immediate support is at $99-98 per barrel.
The first support is at $99 per barrel while the second support at $98
per barrel. The first resistance itself is $100 per barrel, which
needs to be breached. The next one being $102 per barrel in the
immediate short-term. If it breaches $102 per barrel, it is likely to
go as high as $108-110 per barrel.

Post winter, you are likely to see a correction, experts said. The
correction could make it fall to $90 per barrel. So, it is medium-term
bearish and short-term positive on crude.

On how to play it in India?

On MCX crude January contract, the support would be immediately at Rs
3,880 per barrel and the next one would be at Rs 3,860 per barrel. It
is a buy on dips. The dips would be when its touches the Rs 3,880 per
barrel mark, with resistance coming at Rs 3915 per barrel, which was
yesterday's high that it had made and the next one being at Rs 3,950
per barrel.