About Oil Prices

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?

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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.



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David V asked:


The way oil is trading, it’s been outperforming nearly every other investment vehicle.

What is the breaking point? What are the long-term effects?

Will oil prices ever go below $100/barrel?

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Vahid asked:


Well, people who are familiar with Forex and have been into forex trading, know that many of the most important currency trading pairs rise and fall based on the price of oil.

The price of barrel of oil has been a leading factor as well as indicator of the world economy for years now. Based on past trends and current market position experts are predicting that that it is time for change yet again. The relation between the price of oil and the economy of quite a few countries are based on several facts.

To understand how Oil Prices and the Forex Market are related, let us understand one thing; that higher oil price applies brakes on over all consumers spending.

Let us take this discussion a little further to understand it more clearly- we know that the major source of oil for the industrialized countries is petroleum based. Thus the price of various goods produced, to a great extent depends upon the price of a barrel of oil.

If the oil prices shoot up, the production and supply prices for most consumer goods will also shoot up. As a result of this, the expenses of individual consumers will automatically rise as they will have to shell out more towards meeting their very basic expenses like, fueling vehicles and heating homes. The net result thus will see a downward swing in the economy of the country and lowered forex rate in Foreign Exchange Market until such time that it hits a rallying point which will trigger the economy to re-start on an upward trend.

Factors that affect oil pricing could include one or more of the following; the vagaries of the weather, world politics and the actual capacity to meet the demand.

It has been observed that the currency of countries that produce & export oil will rise in value. When value of currency rises in Forex market the environment results in robust economy. Similarly the value of currency of those countries which import most of their oil requirements will drop in value. And it will have an adverse impact on the forex market.

We can conclude that when Oil Prices go up, the economy of the countries having an abundance of oil will improve, the value of their currency will improve in forex market. Likewise, when the oil prices hits a low (which in real life seems like a far fetched dream) the countries supplying oil to other countries suffer loss, their currency suffers a loss in forex market and this will impact their economy adversely.



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Melissa E asked:


Was the run up in oil prices a contributor to the current worldwide economic woes?

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Overt Operative asked:


Iran is suffering severe budget shortfalls because of low oil prices on the international market. Hamas is funded by the state of Iran. Could Hamas be acting under the direction of Iran to push oil prices higher? It interesting to note that no rocket attacks on Israel were happening when oil was over $100 a barrel.

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junkette asked:


oil is at $145 a barrel - no one really knows the exact cause, whether it’s speculators, demand from China and India, peak oil…

And obviously, oil is not just for driving - we use oil in almost every single industry. If oil stays at this price, or climbs even higher, it is going to cause alot of disruption - on a scale that is unheard of - estimates predict it’ll take 10-20 yrs to untangle the economy’s dependence on oil.

So what is your view? Are oil prices going to climb higher or fall?

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carcerate asked:


Basically, America is facing a trying time of oil prices skyrocketing with no sign of the prices coming down. Since most people in the US are reliant on oil for transportation purposes, I think oil companies are just milking the public for all they can get until everybody just gives up driving and rides bicycles to work. What do you think?

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AnthonyMilano asked:


If we look around us, we will see that almost anything which is there either runs on fuel or electricity. This fuel dependence has caused serious economic issues for a lot of countries even for economically developed countries. Free crude oil price quotes. Instant access to latest oil prices, oil commodity charts, oil forecast and oil news.

Oil price is a very important aspect for the current crisis situation and oil drilling is one of the major activities that is being done so far, in the last two centuries, to keep our engines running daily. All the countries in the world are dependent on the oil that is being drilled and then pumped into the pipes regularly.

Oil drilling possibility is a fortune for a few countries in the world and the main nations are the Arab nations like United Arab Emirates, Saudi Arabia, Iraq and Iran. In fact, Russia too has a lot of oil. The crude oil reserves drives their economies as they have nothing else in terms of manufacturing industry or the other industries.

The crude oil price decreased dramatically since 2008 and that is because a lot of factors influenced this decrease. Firstly, the world is growing rapidly and it needs natural resources to make this happen. No one will wait for a late or undeveloped nation.

Half the total population is now emerging out of their poverty onto a critical situation where they need oil just as much as the developed world. 2.500 dollars cars are now available for sale in China, India and the rest of Asia. More than twenty thousand new cars per day are being sold to Chinese citizens who have never owned a car or a truck before. More than that, a steady 10 percent growth per year is predicted to continue for the next decade at least, confirming that demand for oil will not go slower but continue to increase even more.

Another factor is represented by the recent military actions in the country of Georgia, tensions with Iran and North Korea and the sinking value of the dollar on the world currency market. Even without these factors taken into consideration, it is not hard to imagine oil prices increasing and topping the record of 147 dollars per barrel.

But oil is definitely a resource which will be not there endlessly and professionals say that it takes about a million years for the crude oil to be formed. The way the consumption is growing, there will definitely be a cause for worry because the real oil crisis will begin rapidly.

To reduce the dependence and the consumption of oil, to many companies and governments in the world are trying to use the oil in a more efficient manner. For example in some countries, people walk to work daily, they ride their bikes or they drive hybrid cars and that means less oil consumed in a day.

Keep yourself informed about the price of oil by watching daily oil news and by viewing the oil price chart which is very illustrative in this current financial situation.



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Jayeshvasava asked:


Looking back to analysts reports from last year, the momentum of crude oil prices seemed hard to counteract. As oil prices rose, many economists predicted long-run oil prices above $200 per barrel based upon growing international demand and a leveling off of global supplies.

Forecasting the future path of crude oil prices is significantly more difficult, as international demand patterns and new supply exploration depends on a wide variety of factors that can be difficult to predict. Consensus estimates on the future of crude oil prices suggest that long-run prices will continue to slowly rise based upon growing demand from developing nations.

Given the adaptation of global financial markets, many analysts expect a more stable band of shifts in global crude prices after last year’s major price swings.  Speculation on oil futures markets is more related to fundamentals now that there have been growing restrictions on futures markets trading from the FDIC and international governments.  Proposals that seek to move oil trading away from dollar based currencies to a basket of international currencies could further solidify international oil prices in a long, slow upward swing.

Linked to the dollar, which is facing inflation pressures related to growing US debt, crude oil prices can be highly uncertain.  OPEC is continuing to explore alternatives to trading global commodities in dollars, considering an IMF (International Monetary Fund) proposal to trade commodities in a basket of international currencies.

Consensus estimates anticipate a slight upward trend in oil prices for the remainder of the year, with a stabilization of prices based upon the end of the global recession. With a cold winter, demand for crude oil is anticipated to increase, resulting in upward pressure on crude prices as we head toward the end of the calendar year.



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