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Crude Oil Watch – Supply Slump and Price Hikes

Bhamoti Basu

As the United States and allied countries put the Syrian President Bashar al-Assad on notice, with warnings that military actions would be taken against him, on grounds of chemical weapons’ usage against the civilians, such tensions in Syria and the Middle-East ushered in escalation of Crude Oil Prices. Tensions would accentuate further, which means Crude prices would only go higher and higher in days to come.

What are other factors that would instigate Crude price hikes? Here are a few:

Indian Rupee slump – The Indian Rupee has reached an all time low against the US dollar and other major currencies. It has depreciated by more than 13 per cent in 3 weeks and would weaken even further. In a recent decision taken by the Indian Government Food Bill has been passed, with has in turn pressurized the Indian debt by US$ 20 billion. This has brought about fears in the minds of investors that India’s CAD has further increases, which has been the main reason detrimental in bringing down the Indian Rupee. The above move itself has brought down the rupee by approximately 7 per cent in three days. Other major factors which were responsible for bringing the rupee down included bond yields and lower Indian Equity markets, inflation and the festival season being round the corner, demand for Crude Oil and Gold in the country has shot up. These factors have pushed the Indian Rupee further.

Libyan Tensions – Libya's biggest western oilfields have been forcefully shut down as an armed group had shut down the pipeline which linked the oilfields to the ports. This would mean reduced crude oil output from Libya. Total Libyan oil output would be less than 200,000 barrels per day (bpd) vis-à-vis a pre-war level of approximately 1.6 million bpd. Strikes by workers have led to interrupted crude oil exports and slackened output of Libya – meaning a supply glitch for Crude Oil. The Libyan oil ports in the east like Es Sider, Ras Lanuf, Zueitina and Marsa al Hariga, which are responsible for most of the oil production of the country, have been shut down due to the strikes by the workers.

Crude Oil Demand & Supply – Looking at the trends of the recent Demand-Supply gap, it can be stated that the demand for crude oil would outpace the supply by as much as 0.37bbpd in recent future. The most significant of the reason is the supply glitch that has been created as a result of increasing tensions in Libya and falling oil reserves in Cushing, Oaklahoma. The absolute inventories in Cushing for WTI which was shooting up a few months back has witnessed slump and has thus made crude oil prices to reach nearly US$ 106-108.

In its ‘Crude Oil Special Report’, Emkay Commotrade Limited has recommended Crude oil be bought at US$ 110 - 109.5 to move up further to US$ 116.5.

The report has stated the following issues:

Crude oil prices gave breakout from a triangle pattern and after consolidation between US$ 102.0 to US$ 109.0. Prices are expected to have support at $109.5 around i.e. Rs.7550 around in MCX September contract and buying can be seen there.

  • Prices on higher side can target 161.8per cent around 113.7 and 261.8per cent Fibonacci retracement level at US$ 120.8 in coming days. MACD has also given a positive crossover on lower levels indicating positive momentum.
  • Prices on lower side should not close below US$ 105.5 on daily basis to remain positive.

Strategy – Buy Crude oil bet US$ 109.5-US$ 110.0 i.e. Rs. 7450-7500 or cmp 7530 in MCX September contract for target of $116.5 and $120.5 i.e. Rs. 8150 and Rs. 8350 in coming days with stop loss below US$ 105.5 i.e. Rs.7100.

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Falling Rupee Hits Fund FLows in Power Sector

By Debhota Mukherjee

The recent rupee depreciation will affect the cash flows of the power plants with limited or no pass-through of energy and capacity charges as part of tariff. Fuel costs and interest outgo will be higher for such independent power producers (IPPs) due to higher cost of imported coal and largely un-hedged foreign currency (FC) debt, respectively, feels India Ratings & Research, an arm of Fitch Group. It however expects its rated entities will continue benefitting from their favourable tariff mechanism, comfortable liquidity and support from the central and state governments.

While the overall outlook on the power sector remains stable, India Ratings (Ind-Ra) has also outlined the likely challenges to be faced by the power producers. “Fuel pricing and availability, power off-take as well as the weak financial profiles of distribution companies (discoms) will be major credit challenges for the power producers,” it said.

When it comes to gas-based power generation, the cost is expected to go up steeply. As per the Ind-Ra estimates, gas-based generation cost (fixed + variable) is expected to increase by 49 per cent to Rs 6.21/kwh. “This is on account of the recent increase in domestic gas prices to $8.4/mmbtu from $4.2/mmbtu, applicable from April 2014. It will make gas-based power generation 76 per cent expensive compared with a domestic coal-based plant. This would also increase off-take risks for such plants as they would move down in the merit order dispatch,” Ind-Ra report said.

In the short-term, Ind-Ra did not envisage improvements in the plant availability factor for gas-based plants. This would result in a partial recovery of fixed costs, thereby stressing the credit profiles of such plants.

The research wing of the leading rating agency felt that central electricity regulatory commission (CERC) modifications in its benchmark index that determines payment for escalation in imported coal prices will now mirror imported coal price movements more closely. The revised index now has 50 per cent weightage for Indonesian coal compared with nil weightage assigned earlier, despite 73 per cent of steam coal imports being from Indonesia.

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PMO, Petroleum Secretary Plan Possibilities to Check Crude Import Bill

Bhamoti Basu

The Prime Minister’s office has summoned petroleum secretary Vivek Rae for discussing the different measures that are to be taken by the Government to drastically cut down upon the oil import bill which is the biggest threat to the Indian economy at the moment.

The Government had already come up with several measures to cope with the rising import bills like steep increase in diesel prices, followed by weekly scrutiny, or had even plans of cutting down fuel consumption so that the import bill could be reduced, said Foreign Minister Salman Khurshid.

Being the world's fourth-biggest energy consumer, it is expected that soon a steep hike in diesel prices would be announced, as the country has the target of cutting down oil costs by as much as US$ 20 billion. Rising global crude price hike and the sliding rupee slide has left India facing an oil bill which is 50 per cent higher than that at the beginning of the present fiscal.

Speaking on the developments, Salman Khurshid said, "No matter what happens, we will have to cut down on fuel consumption. You can't keep subsiding costs of fuel and not restrict the use of the fuel."

Commenting on the present situation, a senior oil ministry official said, “The Prime Minister has given us a target to reduce country’s import bill by US$ 25 billion in the current financial year. We have worked out a plan that can save about US$ 19- 20 billion.”

Veerappa Moily had already sent a detailed proposal on how to cut down import bills to the Prime Minister. 

In India, almost 40 per cent of fuel demand, that is approximately 1.4 million barrels per day (bpd), is for diesel. Major portions of this diesel is used by trucks, farmers for agriculture and industrial purposes like for back-up generators to cope with the frequent power blackouts in the country.

The proposals put forward by Moily include a one-time hike in diesel, cooking gas and kerosene prices, implementation of direct transfer of cash subsidies, launching intensive fuel conservation campaigns, including street shows so that more oil is imported from Iran and thus more dollars can be saved.

Earlier, Rae had hinted at possible fuel price hikes stating that the consumer should share a bit of the oil subsidy burden. He said, “With limited financial resources, the Government cannot run the risk of inflating the fiscal deficit further as it would lead to further depreciation in the rupee and downgrade in credit ratings.”

“Now crude oil prices have started coming down and the rupee has also started moving up. We will take a view on raising fuel prices in few weeks,” he continued.

Since the Syria crisis has been averted, international crude prices have come down and the rupee has also strengthened to Rs.63 against a dollar. Speaking at a recent conference, an oil company executive said, “If the trend continues, we have to reduce petrol prices by less than a rupee this fortnight. But, revenue losses in diesel, kerosene and cooking gas would remain high and it would be prudent to hike their prices to cut rising subsidy bills.”

At present, oil companies are facing revenue losses of as much as Rs. 12 a litre on diesel, Rs. 37 a litre on kerosene and Rs. 470 per cylinder on cooking gas. Again, according to Government unless stringent measures are taken at this moment, the oil subsidy bill might shoot up to Rs. 180,000 crore in the current fiscal. In the past two months alone, the fuel subsidy bill has gone up by Rs. 20,000 crore, due to the falling rupee and accelerating international crude prices. Rae said, “We cannot run away from reality.”

Ten fuel price hike options have been placed by the oil ministry to the Prime Minister. These include raising diesel prices by Rs. 5/litre, kerosene by Rs. 2/litre and cooking gas by Rs. 50/cylinder. There have also been options of including weekly hikes in diesel rates and of scaling cooking gas prices by Rs. 200 per cylinder in 4 installments.

However, Rae added that there had not been any price hike proposal for the cabinet. “We do not need to give proposal, but we need to sit and fine a solution,” said Rae. The Government fears that ahead of the assembly and general elections, there are political risks of making sharp fuel hikes.