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The Opec decision to cap production is positive for both domestic oil explorers and refiners. “If productions cuts are adhered to, we see the price of crude rise to $55/bbl-60/bbl over the next two years. ONGC and Oil India will be at peak realisation of the last 10 years in this price range,” oil and gas analyst at PhillipCapital, Sabri Hazarika, told BusinessLine.
Besides, under the existing policy, the subsidy burden for LPG and kerosene will not come on upstream public sector undertakings till price breaches $60/bbl, another positive for the explorers, he added.
Shares of ONGC closed 1.19 per cent and OIL 1.96 per cent higher in intra-day trade on Thursday on the prospect of a crude price recovery.
The price for the Indian basket crude has virtually halved averaging at $44.46 in November, against the fiscal 2015 average of $84.16. If prices firm up closer to the $55/bbl range, a glimmer of hope comes in for upstream oil sector players, Hazarika said adding that “if refiners are allowed to pass on the increased prices they will be able to maintain their margins. Further, they can expect an inventory gain.” Senior Vice- President at ICRA, K Ravichandran, said that all will not be pretty for the fiscal math if crude price rallies. He said: “As per our estimates, under recoveries for this year should be around 18,000-19,000 crore. Roughly $1 bbl leads to a $1 billion increase in under recoveries. If the price of crude reaches the $55/bbl - $60/bbl range, the subsidy burden would grow to 20,000-25,000 crore.”
India also seems to have missed the bus to make the most of the low crude price scenario for building strategic petroleum reserves. According to the Integrated Energy Policy of India approved by the Cabinet in 2008, “A reserve equivalent to 90 days of oil imports should be maintained for strategic cum buffer stock purposes.”
The government has built strategic crude oil storages in Visakhapatnam, Mangaluru and Padur with a total capacity of 5.33 mmt. The facilities at Visakhapatnam and Mangaluru have already been commissioned. Commenting on whether India has missed out on a golden opportunity, Ravichandran said, “This is where quick decision-making is very important. When oil price was low, if we would have taken a decision to store up those tanks, it would have been really helped us cut costs.”
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