Why has the oil price fallen so much?
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w s asked:
What logical answer explains oil price falling almost 50% in just 2 weeks?
Cleaning Vinyl Siding
What logical answer explains oil price falling almost 50% in just 2 weeks?
Cleaning Vinyl Siding
What’s the relationship between oil price and stock price?
midian88 asked:
It seems like there’s a relationship between commodity price (oil price in particular) and stock price. What is it?
Interactive Kitchen Design
It seems like there’s a relationship between commodity price (oil price in particular) and stock price. What is it?
Interactive Kitchen Design
What was the average monthly price of oil in september and october?
J B asked:
He everyone,
He everyone,
I am looking for data on the average national (US) price of oil per gallon in recent months, specifically in september and october. Can anyone give me a quote or know where I can find such statistic?
Also, is the threat of recession and recent plunge in the stock market likely to result in lower or higher oil prices?
Thank you.
Wood Pellet Stoves
Why Are The Cheapest Oil Prices On The Stock Market Not Reflected By The Cheapest Oil Prices For Home Heating?
Cheapest Oil Limited asked:
A question often asked is “why is home heating oil not the same price as it was when crude oil was this price?”.
Such a question made headlines in NI (Northern Ireland) in late 2008. A home heating oil website that monitors the cheapest oil in Northern Ireland looked into whether there is a case to answer.
There may be discrepancies but the biggest reason for the difference is in the exchange rates (as oil is priced in dollars).
In November 2007, $64 would have been just over £30. In November 2008, $64 would be around £40. This sort of difference alone would mean oil priced at £300 in Northern Ireland one year could cost £400 the following year in Northern Ireland.
If the price of crude oil remains steady and the pound gains strength against the dollar then there is no reason why we can’t see even cheaper home heating oil.
For the UK, including Northern Ireland, the big question should not be how many dollars a barrel of oil is but how many pounds a barrel of oil is. Although the crude oil price has dropped quite a bit, consumers haven’t got the full benefit of it because oil is priced in dollars and the pound has been weak recently against the dollar. For example, anything that cost US$45 would translate as £22 in the summer but cost £30 now so the exchange rates have been working against the price drops of oil.
However there is only so far it can go. Oil distributors, including those in Northern Ireland, would be quick to point out that they sell kerosene, not crude oil and that other cost factors need to be taken into consideration. If the price of a barrel of oil was free, that doesn’t mean someone is going to get it refined into kerosene and deliver it to your house for free. There are costs that are going to be more static than the stock market prices.
Paint Stick
A question often asked is “why is home heating oil not the same price as it was when crude oil was this price?”.
Such a question made headlines in NI (Northern Ireland) in late 2008. A home heating oil website that monitors the cheapest oil in Northern Ireland looked into whether there is a case to answer.
There may be discrepancies but the biggest reason for the difference is in the exchange rates (as oil is priced in dollars).
In November 2007, $64 would have been just over £30. In November 2008, $64 would be around £40. This sort of difference alone would mean oil priced at £300 in Northern Ireland one year could cost £400 the following year in Northern Ireland.
If the price of crude oil remains steady and the pound gains strength against the dollar then there is no reason why we can’t see even cheaper home heating oil.
For the UK, including Northern Ireland, the big question should not be how many dollars a barrel of oil is but how many pounds a barrel of oil is. Although the crude oil price has dropped quite a bit, consumers haven’t got the full benefit of it because oil is priced in dollars and the pound has been weak recently against the dollar. For example, anything that cost US$45 would translate as £22 in the summer but cost £30 now so the exchange rates have been working against the price drops of oil.
However there is only so far it can go. Oil distributors, including those in Northern Ireland, would be quick to point out that they sell kerosene, not crude oil and that other cost factors need to be taken into consideration. If the price of a barrel of oil was free, that doesn’t mean someone is going to get it refined into kerosene and deliver it to your house for free. There are costs that are going to be more static than the stock market prices.
Paint Stick
why the oil price shows no signs of going back to the 2001 level?
Chao Nan asked:
Isn’t the economy now worse than 2001 and besides that the Dow in recent slump is actually lower than 2002.
Isn’t the economy now worse than 2001 and besides that the Dow in recent slump is actually lower than 2002.
If the oil price can somehow reflect the economy.
But why is the current oil price still higher than price in 2001 dot com bubble? is it still because of speculation?
Or we are really in shortage of oil ?
Direct Vent Gas Fireplace
Oil prices rise above $70 on weaker dollar, Nigerian risk factor
Olukunle Odebo asked:
OIL prices rose above $70 a barrel yesterday amid a weakening U.S. dollar, mixed crude inventory data and a decision by Nigeria’s main rebel group to resume attacks next week on the country’s oil industry.
By mid-afternoon in Europe, benchmark crude for November delivery was up 74 cents at $70.31 in electronic trading on the New York Mercantile Exchange. The contract lost $1.31 to settle at $69.57 on Wednesday.
A slide in the U.S. dollar has helped bolster oil prices, which are traded in the American currency. The euro rose to $1.4794 on Thursday from $1.4687 the previous day and the British pound was also higher at $1.6061 compared with $1.5876. The dollar slipped to 88.29 Japanese yen from 88.60 yen.
Investors were also digesting mixed signals in Wednesday’s crude supply numbers from the Energy Information Administration. Gasoline inventories grew by 2.9 million barrels last week and distillate fuel supplies grew by 700,000 barrels, both bigger increases than analysts expected.
But crude supplies dropped by one million barrels, while analysts had expected a gain of 1.9 million barrels.
Overall, the situation with U.S. supplies had not really changed, said Olivier Jakob of Petromatrix in Switzerland.
“There is not enough underlying demand so the draws of crude oil are offset by a build of products,” Jakob said. “The combined stocks of crude and clean petroleum products are back to being close to the record highs seen earlier in the year.”
Helping oil prices were fresh figures showing that the number of newly laid-off U.S. workers filing first-time claims for jobless benefits fell to the lowest level since early January, as layoffs ease a bit amid a fledgling economic recovery.
The fourth drop in new claims in five weeks is a sign the labor market is slowly healing. But employers are reluctant to hire new workers and the unemployment rate is expected to keep climbing well into next year.
The Movement for the Emancipation of the Niger Delta (MEND) said in a statement late Wednesday that it would burn down all oil installations it has attacked in the past and will no longer limit attacks to pipelines.
Attacks from MEND and unrest in the Delta region have cut Nigeria’s oil production by about a million barrels a day, allowing Angola to overtake it as Africa’s top oil producer.
Recent amnesty deals between the government and some rebel groups had offered hopes of increased oil production, but MEND’s announcement renewed market concerns.
“It looks like it is too early to take Nigeria off the bulls’ list of global hot spots,” said JBC Energy in Vienna.
In other Nymex trading, heating oil rose 1.03 cents to $1.7914 a gallon. Gasoline for November delivery gained 1.32 cents to $1.7335 a gallon. Natural gas for November delivery jumped 11.9 cents to $5.023 per 1,000 cubic feet.
In London, Brent crude rose 92 cents to $68.12 on the ICE Futures exchange.
Heat Pump Prices
OIL prices rose above $70 a barrel yesterday amid a weakening U.S. dollar, mixed crude inventory data and a decision by Nigeria’s main rebel group to resume attacks next week on the country’s oil industry.
By mid-afternoon in Europe, benchmark crude for November delivery was up 74 cents at $70.31 in electronic trading on the New York Mercantile Exchange. The contract lost $1.31 to settle at $69.57 on Wednesday.
A slide in the U.S. dollar has helped bolster oil prices, which are traded in the American currency. The euro rose to $1.4794 on Thursday from $1.4687 the previous day and the British pound was also higher at $1.6061 compared with $1.5876. The dollar slipped to 88.29 Japanese yen from 88.60 yen.
Investors were also digesting mixed signals in Wednesday’s crude supply numbers from the Energy Information Administration. Gasoline inventories grew by 2.9 million barrels last week and distillate fuel supplies grew by 700,000 barrels, both bigger increases than analysts expected.
But crude supplies dropped by one million barrels, while analysts had expected a gain of 1.9 million barrels.
Overall, the situation with U.S. supplies had not really changed, said Olivier Jakob of Petromatrix in Switzerland.
“There is not enough underlying demand so the draws of crude oil are offset by a build of products,” Jakob said. “The combined stocks of crude and clean petroleum products are back to being close to the record highs seen earlier in the year.”
Helping oil prices were fresh figures showing that the number of newly laid-off U.S. workers filing first-time claims for jobless benefits fell to the lowest level since early January, as layoffs ease a bit amid a fledgling economic recovery.
The fourth drop in new claims in five weeks is a sign the labor market is slowly healing. But employers are reluctant to hire new workers and the unemployment rate is expected to keep climbing well into next year.
The Movement for the Emancipation of the Niger Delta (MEND) said in a statement late Wednesday that it would burn down all oil installations it has attacked in the past and will no longer limit attacks to pipelines.
Attacks from MEND and unrest in the Delta region have cut Nigeria’s oil production by about a million barrels a day, allowing Angola to overtake it as Africa’s top oil producer.
Recent amnesty deals between the government and some rebel groups had offered hopes of increased oil production, but MEND’s announcement renewed market concerns.
“It looks like it is too early to take Nigeria off the bulls’ list of global hot spots,” said JBC Energy in Vienna.
In other Nymex trading, heating oil rose 1.03 cents to $1.7914 a gallon. Gasoline for November delivery gained 1.32 cents to $1.7335 a gallon. Natural gas for November delivery jumped 11.9 cents to $5.023 per 1,000 cubic feet.
In London, Brent crude rose 92 cents to $68.12 on the ICE Futures exchange.
Heat Pump Prices
Why did Iranian missile tests cause price of Crude Oil to shoot up?
James King asked:
Why did the Iranian missile tests in 2008 cause the oil price to shoot up to levels of around $140 per barrel?
12 Volt Sump Pump
Why did the Iranian missile tests in 2008 cause the oil price to shoot up to levels of around $140 per barrel?
12 Volt Sump Pump
Fish Oil Price - How to Compare Fish Oil Prices in Order to Get the Best Value For Your Money
Didi Dyke asked:
Comparing one fish oil price to another will help you get value for your money; however, do you really know how to do the comparison? This article is going to tell you the most important factor that determines the value you get.
Some people think that all fish oil is the same; but that is far from the truth. There are certain factors that determine the quality of a brand such as the amount of omega3 it contains. It is important to note that the benefits of fish oil are derived from the dha and epa omega 3 fatty acids it contains; however dha is more important and your emphasis should be on it when buying a supplement.
Most of the supplements on the market contain more of epa because it is easier to concentrate; however, that should not be the case. In fact, you should always look at the fish oil price based on the amount of dha it contains because your body can easily convert it into epa if needed but the reverse is impossible.
That is why it is recommended that supplements should contain at least double the amount of dha than epa; each capsule of 1000mg of fishoil should contain at least 250mg of dha.
When you see that brand ‘A’ fish oil price is $16.85 a bottle and that brand ‘B’ is $12.95 a bottle, you may be tempted to assume that brand ‘B’ is cheaper; however that is correct if you look at the real value you are getting for your money.
Now let us do a little bit of maths: The truth is that brand ‘A’ contains a total of 17,400mg of dha, while ‘B’ contains 9,000mg; hence the cost of 1mg dha of brand ‘A’ is $0.97 while you are paying $1.44 for 1mg of dha for brand ‘B’. Now you can see that in actual sense, brand ‘A’ is cheaper/more cost effective that brand ‘B’ which costs less per bottle.
Apart from the fish oil price, you should also make sure that you buy supplements that are molecularly distilled; this is important because fishoil contains impurities because of pollutions in the oceans. However, molecular distillation ensures that the impurities are removes form the oil, making safe for your consumption.
Now that you know how to compare one fish oil price to another, I hope you will henceforth make informed buying decisions that will give you the best value for your money.
Discover the best fish oil supplement today.
Trane Gas Furnace
Comparing one fish oil price to another will help you get value for your money; however, do you really know how to do the comparison? This article is going to tell you the most important factor that determines the value you get.
Some people think that all fish oil is the same; but that is far from the truth. There are certain factors that determine the quality of a brand such as the amount of omega3 it contains. It is important to note that the benefits of fish oil are derived from the dha and epa omega 3 fatty acids it contains; however dha is more important and your emphasis should be on it when buying a supplement.
Most of the supplements on the market contain more of epa because it is easier to concentrate; however, that should not be the case. In fact, you should always look at the fish oil price based on the amount of dha it contains because your body can easily convert it into epa if needed but the reverse is impossible.
That is why it is recommended that supplements should contain at least double the amount of dha than epa; each capsule of 1000mg of fishoil should contain at least 250mg of dha.
When you see that brand ‘A’ fish oil price is $16.85 a bottle and that brand ‘B’ is $12.95 a bottle, you may be tempted to assume that brand ‘B’ is cheaper; however that is correct if you look at the real value you are getting for your money.
Now let us do a little bit of maths: The truth is that brand ‘A’ contains a total of 17,400mg of dha, while ‘B’ contains 9,000mg; hence the cost of 1mg dha of brand ‘A’ is $0.97 while you are paying $1.44 for 1mg of dha for brand ‘B’. Now you can see that in actual sense, brand ‘A’ is cheaper/more cost effective that brand ‘B’ which costs less per bottle.
Apart from the fish oil price, you should also make sure that you buy supplements that are molecularly distilled; this is important because fishoil contains impurities because of pollutions in the oceans. However, molecular distillation ensures that the impurities are removes form the oil, making safe for your consumption.
Now that you know how to compare one fish oil price to another, I hope you will henceforth make informed buying decisions that will give you the best value for your money.
Discover the best fish oil supplement today.
Trane Gas Furnace
On what measures the OPEC countries decide the price rate of OIL?
propitiousomen asked:
Since we know the OPEC decides the price of oil ,but based on what measure they decide that this week the price will be $78/barrel and next week it is 90/barrel?what makes the oil price fluctuate everyday?
Collectable Kitchen Plates
Since we know the OPEC decides the price of oil ,but based on what measure they decide that this week the price will be $78/barrel and next week it is 90/barrel?what makes the oil price fluctuate everyday?
Collectable Kitchen Plates
Oil price deregulation: Will it benefit consumers or suppliers?
Vikas Sharma asked:
The second term of the UPA government is burdened from the high expectations of oil marketing companies, since the oil sector reforms are said to be a top agenda for the Dr Manmohan Singh led government. News report suggests that the government would be initiating strong measures to introduce reforms in the pricing of petroleum products. After the successful first term (tenure) in the petroleum ministry, Petroleum Minister, Murli Deora, has set forth 6-8 weeks for possible action on the various issues facing the oil sector.
Industry observer feels that in spite of the various positive feelers, it remains to be seen whether the reforms are a substitute arrangement for the long impending structural problem of oil subsidies in the country or prove to be a change in move for the sector. However, given the current unplanned nature of subsidy-sharing, it would be interesting to ascertain who are likely to be the key beneficiaries of the proposed reforms i.e. whether it will lead to improvement in the earnings of the Oil Marketing Companies (OMCs) or upstream segment or government finances?
De-regulation of Retail prices - How long will it work?
A senior official from Bharat Petroleum Corporation Ltd said that this is not the first attempt by the government to de-regulate petroleum product prices. In April 2002, in an attempt to phase out subsidy on petroleum products, the government dismantled the administered pricing mechanism (APM) paving the way for free pricing mechanism for petrol and diesel, while prices of kerosene and LPG were still kept under the Regulator’s purview.”
During 2002, the government gave limited freedom to the OMCs to revise retail prices within a band of +/-10% of the mean of rolling average of the last 12 months and the last 3 months international cost and freight prices. In case of violation of the band, the matter had to be taken up with the Ministry of Finance for modulation in Excise duty rates. “Oil companies were given some freedom to determine the prices based on the international petroleum market. However, the euphoria of dismantling was short-lived,” said an official from state-owned oil corporation.
He said, “When the crude prices began to increase in 2004 and oil companies wanted to pass on the same, but the government interference halted the free pricing of petrol and diesel.” Thus, the past record of implementation of the pricing reforms has not been very impressive.
Pre-requisites for successful implementation of price de-regulation
Successful implementation of de-regulation of subsidized products hinges on following factors:
Stability in crude prices:
Stability in crude prices is a prime requirement for successful implementation of price de-regulation, a technical analyst foresees. However, historical evidence as well as current news reports indicates that price de-regulation will be allowed with certain price bands. So, in the current scenario of volatile crude and product prices, successful continuation of the any possible price deregulation might not be easy.
It may be noted here that post the sharp correction in crude oil prices from US $147 per barrel (bbl) to a low of around US $32 per barrel last year, it has once again bounced back significantly and currently hovering in excess of US $65 per barrel. “Volatility in crude prices is still not behind us, and the government might follow the wait and watch policy before taking a stand over price de-regulation,” he said.
Angel Broking, a domestic broking firm, believe that the crude oil prices are likely to average at US $55/bbl and US $60/bbl in the current and next financial year, which is lower than the estimated cap of US $75/bbl for the free pricing of products. This in turn provides an ideal scenario for de-regulation of the subsidized petroleum product prices.
Stable and lower product cracks of subsidised products:
If recalled, the last fiscal proved to be a nightmare for the OMCs due to substantially higher under-recoveries. Increase in the crude oil price has been the spoil sport. However, it may be recalled that in the past prices of key subsidised products, viz. diesel and kerosene had significantly appreciated higher than their historical levels due to substantially higher product cracks. The increase, which generally tends to be in the range of US $10-12/bbl shot up significantly and added fuel to fire.
However, on account of the ongoing global slowdown, the cracks of diesel and kerosene have declined substantially and are likely to remain under pressure going forward on account of addition of significant refining capacity. “If the cracks remain subdued in line with our expectations, it would result in lower refining profitability for the OMCs. Thus, cracks prove to be a double-whammy as on the one hand while it hurts the marketing operations when they are high and boosts refining, on the other, when they are low it boosts profitability of the marketing operations and dents the refining profitability,” said an official from another state owned oil corporation.
Stable and reform-oriented government:
Industry analysts observe that successful implementation of the pricing reforms requires stable and reform-oriented government. Fortunately, this time around, it seems to be in place. “However, in spite of being a stable government, the UPA is a coalition government with the DMK and TMC as its key allies. With both Tamil Nadu and West Bengal likely to hold Assembly elections in 2011, we believe that the Congress will find it tough to persuade its key allies for the pricing reforms,” said industry analysts.
Moreover, with elections likely to take place in some state or the other every year, complete de-regulation without the price bands is quite unlikely. Moreover, full de-regulation of the subsidized product prices goes against the image of the Congress, as a representative of the “Aam - Aadmi”.
“We do not rule out the possibility of partial price decontrol of transport fuels, but we still continue to believe that partial decontrol within the bands is unlikely to provide solution to the long impending structural problem of under-recoveries for the Indian OMCs as the underlying variables involved in the price determination are volatile in nature,” a source from Ministry of Petroleum and Natural Gas said.
The subsidy burden (without considering the case for de-regulation) for FY2010 and FY2011 is to result in under-recoveries of Rs 15,182 crore and Rs 39,140 crore, respectively. In terms of composition, FY2010 subsidy constitutes only cooking fuel, while in FY2011 almost 3/4th of the subsidy would comprise cooking fuels. Thus, subsidy on auto fuel does not form a major chunk of the overall subsidy burden for companies even if it exists. Thus, possible de-regulation would not lead to material reduction in the overall subsidy burden for the Sector.
Subsidy-sharing structure holds the key
A officer from state owned oil company said, “We believe that possible de-regulation will certainly have some effect on the position of under-recoveries going ahead. However, the possible beneficiary of price de-regulation still needs to be ascertained.” The likely beneficiaries of possible price de-regulation are expected to be determined on the basis of the subsidy-sharing structure between the various stakeholders, viz. the government (via oil bonds), upstream companies (viz. discount on crude and products sold) and the OMCs.
Historically, the trend in sharing of subsidy burden seems to be missing with the subsidy between various parties shared in an ad-hoc manner. For instance, the share of OMCs has fluctuated between 0 - 71%.
The sharing structure of the last fiscal was seen as an exception wherein the government and upstream companies took the burden of the subsidy as the OMCs were unable to share the load on account of huge inventory losses and weak refining fundamentals. Thus, we believe that the OMCs will continue to share the burden on subsidized products. Overall, in spite of the ad-hoc subsidy sharing structure, one can gauge the government’s intent to keep the OMCs profitable to maintain their credit rating and normal functioning.
Given the fact that losses on cooking fuel are likely to remain high on account of non-revision in their prices, as mentioned earlier, the resultant under-recovery on the account of this is likely to be high for the OMCs. Thus, earnings of the OMCs will continue to be highly dependent on receipts from the government by way of oil bonds and upstream discounts. Thus, in spite of all the hype over de-regulation of the auto fuel prices, earnings visibility for the OMCs remains low.
We believe that with things unlikely to change in the coming years, oil bonds and upstream discounts would continue to remain critical for the OMCs due to the large losses in the cooking fuel segment and thus, re-rating of these stocks fundamentally appears low. Nonetheless, though it is easier to believe that the Upstream Segment is likely share around 33% of the gross under-recoveries, predicting the extent of oil bonds is tricky.
The government is likely to be the key beneficiary on the account of de-regulation of the subsidized auto fuel prices. The government could retain the benefits of the pricing reforms by lower issuance of oil bonds to the OMCs in FY2010 and FY2011, especially considering the problems it faces on the fiscal deficit front. “Thus, in spite of the partial pricing reforms, we expect neither the earnings nor the visibility associated with it likely to improve for the OMCs,” said a brokerage firm.
However, the pricing reforms will improve the cash flows of the OMCs, to an extent, as earnings will be substituted with cash profits instead of oil bonds. In a non-deregulated scenario, industry observers 33% subsidy sharing mechanism by upstream, 50% by government and the rest (17%) by OMCs for sharing under-recoveries for FY2010 and FY2011. For FY2010, if the partial de-regulation were to take place and the government reduces the proportion of oil bonds to 50% or less with the upstream companies maintain their share of 33% of gross under- recovery, the OMCs would earn lower profits than in case of non-de-regulation scenario. Similarly, for FY2011, if the oil bonds were to be issued to the tune of around 44% or lower, profits would be lower than in case of non-de-regulated scenario.
Thus, the extent of the oil bonds issued will determine the fate of the OMCs going ahead.
Harman Pellet Stoves
The second term of the UPA government is burdened from the high expectations of oil marketing companies, since the oil sector reforms are said to be a top agenda for the Dr Manmohan Singh led government. News report suggests that the government would be initiating strong measures to introduce reforms in the pricing of petroleum products. After the successful first term (tenure) in the petroleum ministry, Petroleum Minister, Murli Deora, has set forth 6-8 weeks for possible action on the various issues facing the oil sector.
Industry observer feels that in spite of the various positive feelers, it remains to be seen whether the reforms are a substitute arrangement for the long impending structural problem of oil subsidies in the country or prove to be a change in move for the sector. However, given the current unplanned nature of subsidy-sharing, it would be interesting to ascertain who are likely to be the key beneficiaries of the proposed reforms i.e. whether it will lead to improvement in the earnings of the Oil Marketing Companies (OMCs) or upstream segment or government finances?
De-regulation of Retail prices - How long will it work?
A senior official from Bharat Petroleum Corporation Ltd said that this is not the first attempt by the government to de-regulate petroleum product prices. In April 2002, in an attempt to phase out subsidy on petroleum products, the government dismantled the administered pricing mechanism (APM) paving the way for free pricing mechanism for petrol and diesel, while prices of kerosene and LPG were still kept under the Regulator’s purview.”
During 2002, the government gave limited freedom to the OMCs to revise retail prices within a band of +/-10% of the mean of rolling average of the last 12 months and the last 3 months international cost and freight prices. In case of violation of the band, the matter had to be taken up with the Ministry of Finance for modulation in Excise duty rates. “Oil companies were given some freedom to determine the prices based on the international petroleum market. However, the euphoria of dismantling was short-lived,” said an official from state-owned oil corporation.
He said, “When the crude prices began to increase in 2004 and oil companies wanted to pass on the same, but the government interference halted the free pricing of petrol and diesel.” Thus, the past record of implementation of the pricing reforms has not been very impressive.
Pre-requisites for successful implementation of price de-regulation
Successful implementation of de-regulation of subsidized products hinges on following factors:
Stability in crude prices:
Stability in crude prices is a prime requirement for successful implementation of price de-regulation, a technical analyst foresees. However, historical evidence as well as current news reports indicates that price de-regulation will be allowed with certain price bands. So, in the current scenario of volatile crude and product prices, successful continuation of the any possible price deregulation might not be easy.
It may be noted here that post the sharp correction in crude oil prices from US $147 per barrel (bbl) to a low of around US $32 per barrel last year, it has once again bounced back significantly and currently hovering in excess of US $65 per barrel. “Volatility in crude prices is still not behind us, and the government might follow the wait and watch policy before taking a stand over price de-regulation,” he said.
Angel Broking, a domestic broking firm, believe that the crude oil prices are likely to average at US $55/bbl and US $60/bbl in the current and next financial year, which is lower than the estimated cap of US $75/bbl for the free pricing of products. This in turn provides an ideal scenario for de-regulation of the subsidized petroleum product prices.
Stable and lower product cracks of subsidised products:
If recalled, the last fiscal proved to be a nightmare for the OMCs due to substantially higher under-recoveries. Increase in the crude oil price has been the spoil sport. However, it may be recalled that in the past prices of key subsidised products, viz. diesel and kerosene had significantly appreciated higher than their historical levels due to substantially higher product cracks. The increase, which generally tends to be in the range of US $10-12/bbl shot up significantly and added fuel to fire.
However, on account of the ongoing global slowdown, the cracks of diesel and kerosene have declined substantially and are likely to remain under pressure going forward on account of addition of significant refining capacity. “If the cracks remain subdued in line with our expectations, it would result in lower refining profitability for the OMCs. Thus, cracks prove to be a double-whammy as on the one hand while it hurts the marketing operations when they are high and boosts refining, on the other, when they are low it boosts profitability of the marketing operations and dents the refining profitability,” said an official from another state owned oil corporation.
Stable and reform-oriented government:
Industry analysts observe that successful implementation of the pricing reforms requires stable and reform-oriented government. Fortunately, this time around, it seems to be in place. “However, in spite of being a stable government, the UPA is a coalition government with the DMK and TMC as its key allies. With both Tamil Nadu and West Bengal likely to hold Assembly elections in 2011, we believe that the Congress will find it tough to persuade its key allies for the pricing reforms,” said industry analysts.
Moreover, with elections likely to take place in some state or the other every year, complete de-regulation without the price bands is quite unlikely. Moreover, full de-regulation of the subsidized product prices goes against the image of the Congress, as a representative of the “Aam - Aadmi”.
“We do not rule out the possibility of partial price decontrol of transport fuels, but we still continue to believe that partial decontrol within the bands is unlikely to provide solution to the long impending structural problem of under-recoveries for the Indian OMCs as the underlying variables involved in the price determination are volatile in nature,” a source from Ministry of Petroleum and Natural Gas said.
The subsidy burden (without considering the case for de-regulation) for FY2010 and FY2011 is to result in under-recoveries of Rs 15,182 crore and Rs 39,140 crore, respectively. In terms of composition, FY2010 subsidy constitutes only cooking fuel, while in FY2011 almost 3/4th of the subsidy would comprise cooking fuels. Thus, subsidy on auto fuel does not form a major chunk of the overall subsidy burden for companies even if it exists. Thus, possible de-regulation would not lead to material reduction in the overall subsidy burden for the Sector.
Subsidy-sharing structure holds the key
A officer from state owned oil company said, “We believe that possible de-regulation will certainly have some effect on the position of under-recoveries going ahead. However, the possible beneficiary of price de-regulation still needs to be ascertained.” The likely beneficiaries of possible price de-regulation are expected to be determined on the basis of the subsidy-sharing structure between the various stakeholders, viz. the government (via oil bonds), upstream companies (viz. discount on crude and products sold) and the OMCs.
Historically, the trend in sharing of subsidy burden seems to be missing with the subsidy between various parties shared in an ad-hoc manner. For instance, the share of OMCs has fluctuated between 0 - 71%.
The sharing structure of the last fiscal was seen as an exception wherein the government and upstream companies took the burden of the subsidy as the OMCs were unable to share the load on account of huge inventory losses and weak refining fundamentals. Thus, we believe that the OMCs will continue to share the burden on subsidized products. Overall, in spite of the ad-hoc subsidy sharing structure, one can gauge the government’s intent to keep the OMCs profitable to maintain their credit rating and normal functioning.
Given the fact that losses on cooking fuel are likely to remain high on account of non-revision in their prices, as mentioned earlier, the resultant under-recovery on the account of this is likely to be high for the OMCs. Thus, earnings of the OMCs will continue to be highly dependent on receipts from the government by way of oil bonds and upstream discounts. Thus, in spite of all the hype over de-regulation of the auto fuel prices, earnings visibility for the OMCs remains low.
We believe that with things unlikely to change in the coming years, oil bonds and upstream discounts would continue to remain critical for the OMCs due to the large losses in the cooking fuel segment and thus, re-rating of these stocks fundamentally appears low. Nonetheless, though it is easier to believe that the Upstream Segment is likely share around 33% of the gross under-recoveries, predicting the extent of oil bonds is tricky.
The government is likely to be the key beneficiary on the account of de-regulation of the subsidized auto fuel prices. The government could retain the benefits of the pricing reforms by lower issuance of oil bonds to the OMCs in FY2010 and FY2011, especially considering the problems it faces on the fiscal deficit front. “Thus, in spite of the partial pricing reforms, we expect neither the earnings nor the visibility associated with it likely to improve for the OMCs,” said a brokerage firm.
However, the pricing reforms will improve the cash flows of the OMCs, to an extent, as earnings will be substituted with cash profits instead of oil bonds. In a non-deregulated scenario, industry observers 33% subsidy sharing mechanism by upstream, 50% by government and the rest (17%) by OMCs for sharing under-recoveries for FY2010 and FY2011. For FY2010, if the partial de-regulation were to take place and the government reduces the proportion of oil bonds to 50% or less with the upstream companies maintain their share of 33% of gross under- recovery, the OMCs would earn lower profits than in case of non-de-regulation scenario. Similarly, for FY2011, if the oil bonds were to be issued to the tune of around 44% or lower, profits would be lower than in case of non-de-regulated scenario.
Thus, the extent of the oil bonds issued will determine the fate of the OMCs going ahead.
Harman Pellet Stoves