Commodities

Oil prices will rise but that’s good for India

M. Ramesh | Updated on: Apr 27, 2020
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Benchmark Brent crude is currently trading at around $20.65 a barrel (0.1364 tonnes), Indian basket was $17.66 last week. For a country like India, which imports 84 per cent of its oil needs — 213.22 mt of consumption and 34.2 mt of domestic production — this must be sweet music. But how long will this honeymoon last?

First of all, it is not a honeymoon, says Narendra Taneja, a leading energy expert in India. He says that ultra-low prices of oil are not in India’s interests, because there is a flip side to it.

Apart from affecting government’s revenues (as excise duties on oil are based on value), there are other implications, notes Taneja, a National Spokesperson for the BJP.

 

If oil prices continue to be so low, about 20 countries in the world, many from the West Asian region, will slip into recession, he told BusinessLine , pointing out that there are 8 million Indians in West Asia, sending home remittances of $50-60 billion every year.

With several economies in the red, the global economy itself will take a hit, taking India down with it. India, Taneja notes, is also an exporter of petroleum products. Data from the Petroleum Planning and Analysis Cell says that in 2019-20, India exported petroleum products worth $34 billion, though imports were much higher at $112 billion, of which crude oil bill was $95.5 billion.

Steady-state price of oil

Oil price movements, never easy to predict, are even harder to take a call on in the current uncertain times of geopolitics and the Covid-19 pandemic. Experts views vary widely.

Taneja expects crude prices to rise soon after the lockdown lifts and settle down at between $50 and 60 a barrel by next year. He reasons that oil prices have never been either too high or too low in a US election year, as the President would have to work towards an oil price that is both remunerative to the US shale industry but also not too high for the consumers.

He says that a price between $50 and $60 works for everybody.

 

Others disagree. Jean-Louis Le Mee, Chief Executive of the London-based Westbeck Capital Management, which runs the ‘Energy Opportunity Fund’, believes “we are on the other side of the pandemic” and demand would quickly rise after the Covid-19 episode ends and “we could even see unprecedented inventory draws.”

Another expert, Michael Grubb, professor of energy and climate change at the University College London, has a very different view. He feels that sustained prices of oil would never ever be outside the $30-40 range, though short-term spikes and troughs cannot be ruled out.

“I just think the Covid experience has introduced many to ways of living and working they have not previously used and may strike a different balance in the future — these are networked processes so if groups get used to interacting in new ways that is more inclined to stick,” Grubb said in an emailed response to BusinessLine .

Asked if the producers couldn’t agree on price-bolstering production cutbacks, Grubb said, “the more producers, and the more diverse they are politically, the harder will be coordination on cutbacks.”

Filling up storage caverns

Wherever oil prices stabilise in the future, the current situation is a good time for India to fill up its tanks and the pumps at the Indian Strategic Petroleum Reserves Ltd’s underground storage caverns are busy. The public sector company’s CEO & Managing Director, HPS Ahuja, told BusinessLine on Saturday that the country’s storage caverns in Visakhapatnam, Mangalore and Pudur, which together can hold 5.33 million tonnes of crude — corresponding to 9 days of normal times’ consumption — will be full roughly by the third week of May. Ahuja had said on April 7 that the caverns as on that date held crude to 56 per cent of their capacity.

Viktor Katona, an oil trader at a Hungarian oil and gas company called MOL Group, wrote in Oil Price magazine on Wednesday that India’s strategic reserve tanks (underground caverns) had spare capacity to store “16-17 million barrels”, which roughly works out to 2.31 million tonnes.

Katona, an oil expert at the Russian International Affairs Council, currently based in Budapest, also said that Indian oil companies were re-routing deliveries arriving to Indian ports in April and May against contracts made in January and February, by selling it off to other countries. In his article in Oil Price , he mentions Reliance as one of the companies that did it.

However, selling in times of glut is not easy. Hence the government of India had asked oil companies to fill up strategic petroleum reserve capacities. “With remarkably buyer-friendly market prices and an ongoing robust contango, the Indian government has specifically asked state-owned refiners — specifically Bharat Petroleum, MRPL and IOC — to fill SPR capacities,” says Katona.

Published on April 29, 2020

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