Drop in crude prices may not last long

New Delhi, Nov 28 | Updated: Nov 29 2006, 05:30am hrs
Despite international crude oil prices witnessing a drop now, the petroleum ministry expects the trend to reverse shortly.

High international crude prices during the year have resulted in the consolidated profit of oil marketing companiesIndianOil, HPCL, BPCL and IBPfor the first six months of the current fiscal at a mere Rs 5,652 crore. This, too, was possible with the support of government oil bonds worth Rs 14,500 crore coupled with the upstream assistance of Rs 12,000 crore from ONGC, GAIL and Oil India (OIL), besides the sale of ONGC shares by IOC worth Rs 3,225 crore.

In the absence of this support, oil PSUs would have incurred huge losses. The projected under-recoveries of oil marketing firms for the second half of this fiscal (if prices remain at current $56-58 a barrel) are Rs 520 crore a month for diesel, Rs 1,370 crore a month on kerosene and Rs 840 crore a month on LPG (cooking gas). This is as against the under-realisations of Rs 33,200 crore on sales of petrol, diesel, domestic LPG and PDS kerosene during the first half.

For November alone, when crude prices averaged $57 a barrel, the estimated under-recoveries on diesel stand at Rs 330 crore, kerosene at Rs 1,330 crore and LPG at Rs 790 crore. Under-recoveries have a direct correlation with profitability as it represents the difference between retail prices based on trade parity and price actually charged from the consumer.

The current drop appears temporary as even the projections by Energy Information Administration (EIA), US Department of Energy indicate an increase in crude prices in 2007 to $67 a barrel, a recent note of the petroleum ministry said.

During winter, crude prices are expected to rise due to higher requirement for heating. Oil cartel, OPEC has recently announced a cut in their output of 1.2 million barrels per day and would also review the situation in December, 2006, for further cuts (expected to be one million barrels a day with a view to reduce supply and maintain oil prices at higher levels).

In its latest report, OPEC has indicated that there is still a chance that a very prolonged cold snap might support crude and petroleum product prices. The current drop, it said, appears to be temporary.

The OPEC resolve, emerging geo-political risks, strong demand forecast in 2007, anticipated decline in winter stocks are all expected to put pressure for further increase in the international prices, the ministrys note said.

Despite an increase in domestic prices of petrol and diesel over a period, there has been no revision in LPG and kerosene prices over the last two years. As a result, subsidies on these two fuels have been mounting year after year. Consumer prices of LPG were increased twice by Rs 20 a cylinder on June 16, 2004 and November 11, 2004. However, the price of kerosene has not been revised at all.