The price of petrol is expected to rise 5-8 per cent and that of diesel by 6-8 per cent over the next three-four months, according to report by Crisil Research. This follows last Wednesday’s decision by the Organisation of Petroleum Exporting Countries (OPEC) to cut crude oil production by 1.2 million barrels per day.
In Mumbai, this would mean petrol prices could top Rs. 75 per litre compared with Rs. 72 now, and diesel more than Rs. 64 compared with Rs. 60. The price of Brent crude could increase to $50-55 per barrel by March 2017 following OPEC’s move, and if it surges to $60 as some believe, the price of petrol could touch Rs. 80 and diesel Rs. 68 per litre, the research firm said.
“A cut in production always lifts prices, but the success of the OPEC agreement depends on adherence. Previously, there have been instances of members breaking away from the cartel because of domestic compulsions,” it said.
“As for domestic demand, we expect demonetisation and the consequent reduction in economic growth to curb usage, but things would rebound once the currency in circulation reverts to normal levels,” it added.
Rising crude prices also means profitability of public sector refiners would improve in the third quarter of the current fiscal driven by inventory gains. In December, the average price of Brent is seen over $50. Given that refiners typically book crude 30-40 days in advance, prices for December delivery will be lower at about $46 – as was seen in November.
This inventory gain is what will boost the GRMs of public sector refiners in the third-quarter to $6-7 per barrel levels from $3.8 in the second quarter.
But this benefit will not be available in the fourth quarter because of higher procurement prices even as product spreads remain stable. Over the long term, however, healthy volume growth would drive revenues of oil marketers.
Globally, oversupply is estimated at about 1.4-1.7 mbpd at present, which means the OPEC production cut would balance out demand and supply in the second half of 2017.
What will also curb a runaway rise in crude prices is that above $50, many shale producers in the US become viable once again. Shale oil production from many reserves such as the Bakken Field in North Dakota, and Permian and Eagle Ford in Texas become profitable if crude prices are at $50-55.
About 0.3-0.4 mbpd of production could return from these areas.
Additionally, with the financial situation of the US oil and gas industry improving compared with last year, Crisil expects production ramp-ups to be faster next year, which, in turn, would act as a natural check on crude prices.
As a result, Crisil Research expects Brent crude to remain range-bound at ~$50-55 in the first half of calendar year 2017. Eddie Yarbrough Authentic JerseyShare This