Analysts at the credit rating and research agency, ICRA, predict a negative outlook for crude oil producing companies but a stable outlook for oil refiners — though at the moment, things are pretty bad for both.

ICRA estimates that Indian petroleum refiners, such as IOC, BPCL and Reliance, would suffer a loss of ₹33,000 crore for the January-March quarter of 2019-20 from the fall in value of the crude oil inventory they hold. A bunch of negatives are folding up on the oil refining companies. Demand for petroleum products is falling precipitously (as such, inventory holding costs are likely to burden.)

In April, demand for the aircraft fuel, ATF, fell by 94 per cent—the sharpest among all petroleum products. This was followed by a 64 per cent demand fall for petrol and 61 per cent for diesel.

Light, heavy crude

Further, the difference between the prices of light and heavy crude is disappearing. Indian refineries — at least the more modern ones — have been built for handling the cheaper heavy crudes. Now that advantage is going away, ICRA’s experts said in a webinar on the impact of the Covid-19 pandemic on the oil and gas sector, today. Further, a delay in payment of subsidies by the government is anticipated, and the government is also likely to demand a higher dividend payout to shore up its own finances.

On the other hand, refineries would get some relief by the lesser working capital requirement due to lower crude prices, nil under-recoveries (loss on selling some products) and “more liberal credit period by suppliers.”

Thus, the oil refiners are affected by several negatives and some positives at the moment, but their fortunes will turn for the better once demand for petroleum products pick up, after the lockdown is gradually lifted. Therefore, ICRA’s verdict: stable outlook.

Upstream players

The upstream companies, such as ONGC, OIL and Vedanta, are less lucky. ICRA expects the benchmark Brent crude prices to hover between $20 and $40 a barrel, “with intermittent volatility depending on news flow,” as the global economy shrinks 3 per cent.

This is not good for ONGC and OIL. ICRA estimates the break-even costs of these two companies at $31.9 and $33.5 a barrel. The cost is broken down in terms of the cost of finding and producing the oil ($12.3 and $9.5, respectively for the two companies), operating costs ($9 and $11.3) and fiscal levies ($10.6 and $12.8). Fiscal levies, then, account for 33.2 and 38.2 per cent of break-even costs.

With oil prices likely to remain under pressure in the near term due to spread of coronavirus and consequent demand destruction, it is “negative outlook” for upstream players “due to weak realisations on oil.”

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