Making sense of the price movements of global crude oil is mind-boggling as a matter of course. In fact, several theories abound on what is driving prices in a certain direction.

But, the last six months have been particularly exasperating if you’re in the business of tracking crude and estimates, for the future vary from crude reaching all-time lows or returning to record highs, depending on whom you speak with.

Structural shift

Brent crude, the global spot price benchmark, fell from $115 a barrel last June to $47 this January.

While this was good news for fuel consumers, no one really knows how long the party will last.

And if you’re in the business of prospecting for oil, there isn’t any party at all.

Fereidun Fesharaki, Chairman of global energy consultancy FACTS Global Energy, at a conference conducted by Edelwiess in Mumbai last week, described the current developments in world oil markets as a permanent “structural shift”, with the dawn of American shale nudging Saudi Arabia off its throne as the oil market’s “swing player”.

Slippery ground

Fesharaki believes the oil market will remain in over-supply until Q4FY15 and thereon forecasts oil prices to remain capped at $70 a barrel over the next few years, as any increase from here will encourage non-conventional players (like American shale oil producers, Canadian oil sands) to return to production.

BP, one of the world’s biggest oil and gas companies, in its recently published Energy Outlook for 2035 doesn’t take a call on future prices but expects the growth in tight (shale) oil to slow while West Asian production gains ground once more.

An official with an Indian oil marketing company said, “It’s impossible to take a call on where crude prices are headed. Since this is a commodity driven by political and not economic motivations, there is no telling what will happen. In fact, we won’t be surprised if crude falls to $40.”

Brent prices have been inching up again through February; it now stands at over $60 a barrel. “But on the other hand,” the oil marketing official said, “It’s still too early to see if the spurt in prices can be sustained.”

Wild volatility in prices wreaks havoc with an oil company’s financials.

For the December quarter, of the three state-owned oil marketing companies, IOC and BPCL reported total inventory losses of over ₹13,000 crore, while HPCL didn’t reveal its equivalent figure.

Stable price band

“The problem for us, companies, is to constantly plan inventory management during periods of high price volatility. We prefer a stable price band of $76-80 a barrel.

“This would help all associates involved, starting with explorers like ONGC to fuel marketers.”

Refiners were hit particularly badly last quarter because of the sharp fall in crude prices. For an explorer and refiner like state-owned ONGC, lower realisations as well as subsidy payouts (it reimburses oil marketers for selling kerosene and LPG below market prices) cut its third quarter profits by half from the year-ago period.

Not responsive

How the volatility in global crude plays into your fuel bills at home is equally difficult to call.

While petrol and diesel prices have been cut marginally in tandem with Brent crude (see chart), energy consultant Fesharaki said that the “benefits have not been completely passed on to consumers, as the Government has either cut subsidies or hiked taxes, making local oil demand not responsive to falling oil prices.”

comment COMMENT NOW