After hitting an 18-month high of $17.66 on Thursday, crude oil prices have declined marginally to close at $17.50. Analysts say that the reason for the recent surge in prices is falling US inventory. American Petroleum Institute (API) industry group reported a near 5,00,000 barrel drop in the US crude stocks. There are, however, other technical and fundamentals reasons for the sharp rise in oil prices.

Technical analysts say that oil prices have been low for quite some time and this has provided a very strong support for a good jump in the prices. The surge in prices has been helped by a slow but steady pick-up in demand from Asian countries which were earlier reeling under the pressure of prolonged recession. Besides the easing out of activity in Yugoslavia, adherence to their output cut pledges by the OPEC countries has fuelled the price rise. Another contributing factor has been the fact that the US is looking into the possibility of dumping by Saudi Arabia, Mexico, Venezuela andIraq.However, there are many who believe that the rise in oil prices is too sharp to sustain. Among the main reasons cited by them for their bearishness is that OPEC countries might be tempted to increase output after the sharp price hike in their September meeting, six months before the agreed deadline of the current quota of March 2000. Secondly, Asian economies will not be able to sustain the hike in crude oil prices, which have almost doubled and reached the 1997 level, the year when the Asian crisis began. Currencies of most of the Asian tigers have plummeted, which will make imports that much more costlier. The only country in the region that will benefit from the rise is Indonesia which is a part of the OPEC cartel.

The recent hike will force an increase in supply from non-OPEC countries and production from wells which had shut down after prices fell below $12-13 per barrel. Further, the sharp rise in crude oil prices has not been completely absorbed by the refiners, who are facing a squeeze in theirmargins, as product prices have not appreciated in the same proportion. Then there is the question of inventory trap. Analysts say that as the price rises past US $15-$16 for WTI, refiners will draw down inventory, reducing demand and placing downward pressure on prices.

Whatever, the case may be, the easing in prices is likely to take some time. Where does this situation leave India? Oil production as a percentage of consumption has fallen to a low of 40 per cent. This is likely to plummet after Reliance commissions the first part of its refinery (18 million tonnes). In other words, the oil import bill is going to take a beating. This is going to put the economy in shambles. Though ONGC will benefit from the rise in oil prices, the company is not able to produce more. Further, the company has lost out on the chance to enhance the production of its Neelam oilfield in Bombay High when the prices were low. Thus the gains to ONGC will be only be temporary unless it strikes a majoroilfield.

Thermax

Despite the stock price appreciating by 53 per cent in the last 26 trading sessions, Thermax, at the current price is available cheap for more reasons than one. First, unlike in the first quarter of the last two years, this year, the company will manage to post a net profit. Though the order book is nothing to get excited about (a growth of 15 per cent on a q to q basis), it is executing lot of small orders.For example, the first micro-turbine (each module is of 75 kw) was installed at the Chembur unit of Mahanagar Gas three weeks ago. Thermax imports the product from its collaborator - Allied Signal Power Systems of the US - and sells it in India, earning a spread. It already has orders from Oberoi Agra for 12 more units. The pre-condition being that first unit should be operational for at least eight weeks (in accordance with the specified performance criteria) before any other unit can be sold will mean that the second consignment will be reflected in the second quarter.Micro-turbine not only results in cheaper and more reliable power than the grid, but also comes with option of the attachment of either a heat recovery boiler or a vapour absorption chilling machine (VACM) at the back end. Though more and more states are opting to ban captive power units, sales of micro-turbines will not be affected by the state policies because no government can ban CPPs with each module of 75 kw. In any case, the senseless policy of banning CPPs will require just one public interest litigation to be squashed. In 1999-2000, Thermax should be able to sell 300 units of micro turbines.Two major projects of Thermax should manage financial closure (FC) latest by the end of the financial year. Even in the best case scenario of FC during the current quarter, the major portion of the profit of even the Malaysian IPP (Rs 350 crore) in Chennai will be reflected next year. The other major contract (Rs 80 crore) is to set up a co-gen unit for a Maharashtra-based sugar co-operative.

For theChennai-based IPP, engineering has been completed and hence the project will come up much faster (expected to be six months) than the normal schedule of 24 months after zero date. For both the projects, Thermax is EPC contractor and for the IPP, it will also supply HRSGs. The FC of both the projects was delayed because of promoters not being able to bring in their equity. According to the management, the problem is now solved. For the IPP, Thermax has already received payment for the work done but it is not booked as the revenue but shown as advance from the customer. It is the policy of the company not to include projects in the order book till the financial closure is over. Another order is from a power plant being set up by Bhel in north India for the water management system of the plant. The order size is Rs 25 crore. It also has a three-year O&M contract (negotiable) for Arvind Mills' 2*27 MW naphtha-based power plant which was set up by Thermax. The lease deal with BSES-Kerala (Rs 35 crore) is yet to besigned and not expected till the third quarter of the year but Rs 16 crore order from Nirma has been executed and will be reflected in the first quarter results.

With contributions from Shishir Asthana & Urmik Chhaya