Oil prices may stay steady next year

Though global crude prices have come down by almost one third after reaching its peak in October, it is likely to rise moderately from the current levels due to an expected cut in output by the Organisation of the Petroleum Exporting Countries (Opec) and expiry of Iran sanction waivers. However, the second half of the year may see a negative trend if the world economy doesn't improve from the tariff war setback. Analysts expect Brent oil to remain in the broad range of $65-70 a barrel on expectations that fundamentals remain intact for the next year. Further, the city gas distribution is likely to get a big push in the coming year.

The movement of oil prices will be closely watched by the government as well as the citizens, as India prepares for the general elections slated for mid-2019. The government at the Centre usually likes to keep oil prices under check, especially during the run-up to the election as an increase in the price of 'black gold' leads to a rise in inflation, which hurts the voters' sentiment.

According to oil marketing companies' (OMC) executives, DNA Money spoke with, the crude prices remained volatile all through the current year due to various geo-political challenges. While the government faced criticism due to rising fuel prices, it also hurt the marketing margins of the OMCs.

"It was a lot of pain," said a senior executive from an OMC. The government even asked the OMCs to take a Re 1 cut, which would lead to a cumulative loss of close to Rs 7,200 crore over a period of six months.

The oil prices witnessed volatility this year with prices peaking in October after crude reached to about $84 a barrel. Increased global prices led to a steep rise in petrol and diesel prices in India. However, prices cooled off later as the US crude oil production reached a multi-year high to 11.6 million barrels per day. Russia and Saudi Arabia also pumped more oil to compensate the loss of supply due to US sanctions on Iran. This led to a crash in oil prices as production rose sharply amid pressure from the US President to increase supply. Further, the US also granted sanction waivers to eight nations for 180 days that will expire in early May 2019. However, in order to prevent a further drop in oil price, Opec agreed to cut production by 1.2 million barrels per day from October levels and agreed to exempt Iran from slashing output.

K Ravichandran, senior VP & group head, corporate ratings at Icra, said that current crude oil prices are 'unsustainable' and are most likely to remain around $65-70 in the coming months. "That will be a manageable level for the refiners and will not be much of pressure" said Ravichandran. He added that the overall sector is likely to grow, especially the city gas distribution (GSD) segment as there is a lot of scope for expansion.

According to Abhishek Bansal, founder and chairman of currency derivative and broking firm ABans group, the US and China will be discussing tariff issues for 90 days after the G-20 meeting on

December 1, and if they are able to resolve all pending issues, it may support the world economy and a rebound can be seen in oil demand.

Opec expects the demand for oil to be about 1.1 million barrels a day, less than that in 2018, and 1.4 million barrels below the current Opec production.

As per the latest report by Care Ratings, in the current oil market scenario, the prices of crude oil are not likely to rise more than $65/bbl, but at the same time, the fall in prices is likely to be limited.

Care Ratings in its report added that any increase in oil prices is always going to be a cause of concern for India considering we import more than 80% of our oil requirements. In the current financial year, India has imported around 4.6 million barrel per day. Any increase in oil prices is always going to be a cause of concern for India considering the country imports more than 80% of our oil requirements. "Impact is to be felt in terms of trade deficit, on the markets, Indian basket of crude oil prices and exchange rate." the report added.

EXPLORING WAYS

• Rs 7,200 cr – cumulative losses of oil companies over the next six months
   
• $84 per barrel – crude oil price hit a high in October
   
• $11.63 mn barrels/day – US crude oil production reached a multi-year high