Opec's decision to cut production from next month may lead to increase in fuel prices and massively boost the margins of state-run refiners.
Oil cartel Opec's decision to cut production from next month may lead to a 5-8% spike in retail prices of fuel over the next three-four months and massively boost the margins of state-run refiners, says a report.
A Crisil report said the price of petrol may rise 5-8% and that of diesel by 6-8% over the next 3-4 months following the production cut and the resultant spike in crude prices. It also sees a near doubling of gross refining margins (GRMs) of public sector refiners in the December quarter to $6-7 per barrel levels from $3.8 in the second quarter as the oil companies average prices for December delivery will be lower at $46 as was seen in November.
Last Wednesday, Organization of Petroleum Exporting Countries (Opec) had decided to finally to cut crude production by 1.2 million barrels a day. In Mumbai, that would mean petrol price can top Rs 75 per litre compared to Rs 72 now, and diesel more than Rs 64 from Rs 60 at present, the report said, as the Brent crude may jump top $50-55 a barrel by March 2017, and if it surges to $60, the price of petrol may touch Rs 80 and diesel Rs 68. A production cut always lifts prices, but the success of the Opec agreement depends on adherence. Previously, there have been instances of members breaking away from the cartel because of domestic compulsions, the report noted. On domestic demand scenario, the report expects the demonetization and the consequent reduction in economic growth to curb usage, but things would rebound once currency in circulation reverts to normalcy. Rising crude prices also means profitability of public sector refiners would improve in the third quarter driven by inventory gains.
In December, the average price of Brent is seen over $50. Given that refiners typically book crude 30-40 days in advance, prices for December delivery will be lower at $46 as was seen in November. This gain will boost GRMs of public sector refiners in the third quarter to $6-7 per barrel levels from $3.8 in the second quarter. But this benefit will not be available in the fourth quarter due to higher procurement price even as product spreads remain stable. Over the long term, however, healthy volume growth would drive revenues of oil marketers. Globally, oversupply is estimated at 1.4-1.7 mbpd at present, which means the Opec production cut would balance out demand and supply in the second half of 2017. What will also curb a massive spike in crude prices to above $50, many shale producers in the US become viable once again. Shale oil output from many reserves like the Bakken Field in North Dakota and Permian and Eagle Ford in Texas become profitable if crude prices are at $50-55.