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With a historic dip in crude oil prices since June last year, coupled with projections of sustained low levels in the year ahead and the beginning of direct liquefied petroleum gas (LPG) subsidy transfer, the government's petroleum subsidy outlook for 2015-16 appears bright.
The price of the benchmark Brent crude oil dropped around 60 per cent between June 2014 and January 2015, plunging to a six-year low of $47 per barrel in January. Despite a 17 per cent to $59 per barrel since then, global ratings agency Moody's forecasts Brent oil prices will be at $55 a barrel in 2015, $65 a barrel in 2016 and $72 a barrel in 2017.
The lower prices have brought down gross underrecoveries of oil marketing companies (OMCs) on subsidised sales of petroleum products, from Rs 139,869 crore in 2013-14 to Rs 67,000 crore in the nine months ended December. For the full year 2014-15, these losses are estimated at Rs 77,000 crore, a 55 per cent decline over the previous year. (LOCK, STOCK AND BARREL)
Finance Minister Arun Jaitley revised the government's share of subsidy burden to Rs 60,000 crore in this year's Budget from Rs 63,000 crore budgeted last year. He has also budgeted for a halving of the petroleum subsidy to Rs 30,000 crore in 2015-16 - Rs 22,000 crore on LPG and Rs 8,000 crore on kerosene sales.
Analysts say the government is comfortably placed to meet its fuel subsidy obligation from the allocated Rs 30,000 crore, given the bearish crude price sentiment. "We believe the subsidy provided at Rs 30,125 crore for 2015-16 will be largely sufficient to meet the subsidy for 2015-16 and carried forward amount of around Rs 8,400 crore from 2014-15, because of significant fall in gross underrecoveries for the sector in the second half of 2014-15," said K Ravichandran, senior vice-president at ratings agency ICRA.
Analysts estimate OMCs' gross underrecoveries to come down to Rs 42,500 crore in 2015-16, based on an assumption of crude oil price at $60 a barrel and a dollar-rupee exchange rate of 62. "Assuming 50 per cent share of the government for meeting the underrecoveries, the overall subsidy provided for 2015-16 should be adequate," Ravichandran added.
According to equity research firm Prabhudas Lilladher, apart from the lower crude oil prices, the maneuverability of the government to provide less (as subsidy for the next financial year) has been high because of the beginning of direct transfer of LPG subsidies. The government has so far transferred Rs 8,652 crore directly into beneficiary accounts covering 122 million of the total 150 million LPG consumers.
In the current year (2015-16), analysts expect global crude oil prices to average between $60 and $70 per barrel. OMCs' losses are broadly estimated to be close to Rs 55,000 crore based on a crude oil price of $70 per barrel and a dollar-rupee exchange rate of 63. In that case, the government and upstream firms might have to bear Rs 28,000 crore each as subsidy burden, assuming the compensation is split in half. If crude prices average $60 a barrel, losses could be close to Rs 42,500 crore
ICRA, however, cautions any sharp rise in oil prices and material weakening of rupee-dollar in the near term will be key risks in the year ahead. The Indian basket of crude price has risen 21 per cent from an average of $46 a barrel in January to $56 a barrel in February this year. Prices are likely to be in the sub-$60 a barrel range for about a year. "Low global oil prices will last for the next year and a half; then, there will be uncertainty," International Monetary Fund (IMF) Chief Christine Lagarde had said on March 16 here.
ICRA says prices are expected to remain at subdued levels ($55-60 per barrel) in the near term because of high supplies from the US, weakening of demand in China, the euro zone and Japan, as well as the decision of the Organization of Petroleum Exporting Countries (OPEC) to defend market share. However, any change in the stance of OPEC towards production levels, significant geopolitical events and a cutback in supplies by high-cost shale oil players could alter the bearish scenario; these factors will be key sensitivities for oil prices and might impact the petroleum subsidy outlook significantly.
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