• Govt oil subsidy burden to be within budgetary allocation in FY2017 despite crude price rise; positive for upstream cos: ICRA

    With crude oil prices of $50-60 for the balanced months in FY2017, government oil subsidy burden to be around Rs 170-190 billion for FY2017, which would be well within budget allocation of around Rs 270 billion for the current fiscal, ICRA today said.“Thus, the fiscal position of the government of India is unlikely to be affected for FY2017,” K Ravichandran, Senior Vice President, Head Corporate Sector Ratings said.

    The gross under-recoveries on subsidised domestic liquefied petroleum gas (LPG) and public distribution system (PDS) kerosene are expected to increase by around Rs 12-15 billion for FY2017 with every $5/bbl sustained increase in crude oil prices for the rest of FY2017.
    The impact of higher crude oil prices on the government fiscal may be limited in FY2018 as well because gross under recoveries would not increase significantly up to crude oil prices of $60-65/bbl due to ongoing regular small hike in prices of subsidised LPG and kerosene on a fortnightly/monthly basis.

    In terms of impact on foreign exchange outgo, the rise in crude oil prices along with recent depreciation in rupee against US dollar are expected to increase net crude oil and petroleum products import bill of the country by around $4 billion for crude oil prices of $55/bbl for the rest four months in FY2017.

    Read more: OPEC output cut could force government to slash excise duty on fuel, bring relief for upstream firms

    Assuming a rise in the average crude oil price to $55/barrel in the remainder of the year from the average of $45/barrel in April-November 2016, would have a first round impact of raising average WPI inflation by around 50 bps and CPI inflation by around 20 bps in December 2016-March 2017.

    As per existing under-recovery sharing formula, the government bears domestic LPG subsidy upto Rs 18/kg (around Rs 255 per cylinder) under the Direct Benefit Transfer for domestic LPG (DBTL) and kerosene subsidy up to Rs 12/litre.

    “Post ongoing small increase in LPG and kerosene prices, the threshold crude oil prices for these subsidy levels would be around $55-60/bbl for kerosene and nearly $65/bbl for LPG. Hence, PSU upstream companies (ONGC and OIL) are likely to benefit from rise in crude oil prices as their net realisations would increase with nil or minimal under-recovery burden upto the level of US$60/bbl, as per the current subsidy sharing formula,” said Ravichandran.

    Private crude oil producers would directly gain from higher crude oil prices. Nonetheless, at crude oil prices beyond $55/bbl, upstream companies may feel the pinch of higher cess burden levied at domestic crude production as the same was revised to 20% ad-valorem (16.67% on net sales realisation) from fixed Rs 4500 /MT (US9/bbl) in the Union Budget 2016-17, he added.

    The downstream crude oil companies are expected to report inventory gains in Q3 FY2017 resulting from spike in crude oil and petroleum product prices. However, higher crude oil prices would also lead to higher working capital borrowings and interest burden, negatively impacting the net profitability in the ensuing quarters. Besides, marketing margins of oil marketing companies may moderate with sustained increase in crude oil prices and increasing competition from private retailers.

    Organization of the Petroleum Exporting Countries (OPEC), on November 30, 2016, has agreed to cut total crude oil production of its member countries by 1.2 million barrels per day (mbpd) from January 2017.

    The decision by the OPEC has led to spike in global crude oil prices by around 15% with Benchmark Brent Crude futures touching $54/bbl. The deal by OPEC also includes coordination with Russia, a large crude oil producer but not an OPEC member.

    Any further rise in crude oil prices and sustainability at higher levels would depend upon actual cut in production by different OPEC members and Russia up to their commitment levels. Notwithstanding that, oversupply in global crude oil market may persist in the medium term with higher crude oil prices giving pricing power to US shale oil producers to raise production levels. Thus, with rebalancing of the market, global crude oil prices may not increase significantly over the medium term. Lane Johnson Authentic Jersey

    Share This