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It is said that the first casualty of a war is truth. However, for modern man, much before truth would come crude oil. So, even a bit of war-mongering by Washington and London over Syria was enough to put crude oil prices on fire in the international market last week. On August 28, Brent crude hit a six-month high of above $117 a barrel, while US crude oil touched a 27-month high of $110.17 a barrel. To add to the jitters of a watching world, analysis by French financial services major Societe Generale, highlighting a possible supply disruption in West Asia, warned of prices touching $150 a barrel.
US President Barack Obama's statement threatening military intervention against President Bashar al-Assad in Syria for use of chemical weapons in the uprising there, added to the anxieties about crude oil, already in crisis after Libya's oil industry fell to armed groups since the fall of Muammar Gaddafi. These developments have raised several questions. Where are the international prices heading? How will it impact India?
ARE PRICES HEADED NORTH?
While some reports talk of crude oil prices touching $150 a barrel, a majority of analysts believe that even in the worst-case scenario, a barrel will not cost more than $125. "Even though there are takers for the argument that it may move further north, it will not cross $120-125, even if the Western powers attack Syria," believes Debashish Mishra, senior director, Deloitte India.
The major cause of concern is on the supply side. Though Syria is not a major producer globally, Libya has a considerable share in the international crude oil pie. The North African country's crude oil production has reportedly dropped from 1.4 million barrels a day in January to just 250,000 barrels per day (bpd) now, while its exports too are a casualty of the crisis, slipping down to around 145,000 bpd against a capacity of 1.3 million bpd.
"Even during the Iraq war, the price did not increase by more than $10 a barrel. So, today too it is not likely to increase dramatically from the current range of $115. The price depends on how the socio-political scenario shapes up in the next one month," says Emkay Global Financial Services' Dhaval Joshi.
Meanwhile, giving a breather to global consumers, British lawmakers have rejected any backing to a possible US-led strike on Syria. The news brought down the prices to $114.01 a barrel at one point on Friday. To calm the nerves further, the International Energy Agency too stated that there was no need for an emergency stock release as market supply was good enough.
"In another six months' time, the Brent prices are going to stabilise at $105-110 a barrel, if the Western powers retract their decision on military action against Syria. Even the US appears to be softening the stance now with Obama stating that he has not made up his mind," Joshi adds.
According to EIU Economic and Commodity forecast for 2013-17, Brent prices would be in the range of $104.8 a barrel by the end of 2014 and are likely to be around $107.3 in 2015, $110 in 2015, touching a maximum of $115 a barrel in 2017. It also sees the WTI prices in the range of $104.7 by 2017. Analysts also believe that a spike in prices would be short-lived as it could lead to a fall in demand in international markets. Moreover, the largest oil producer, Saudi Arabia and other countries are likely to pump out more crude oil to balance the short supply.
The global supply disruptions reached 2.7 million bpd in July, according to US Energy Information Administration. For those who want to gauge the economic impact of a likely increase in prices, reports suggest that even $10 increase in price would reduce global GDP by 0.2-0.3 percentage points.
IMPACT on india
The price rise is alarming for India, as the composition of its basket represents the average of Oman and Dubai for sour grades and Brent for sweet grade in the ratio of 68.2:31.8.
With the rupee scaling new lows close to the Rs 70-mark vis-a-vis the dollar, a crude-oil price rise due to any US intervention in Syria or an increase in Libyan unrest would prove a double whammy for India's already bruised economy. This is evident in Petroleum Minister M Veerappa Moily's words, "There is serious cause for concern because of the fall in the rupee and a rise in international crude oil prices." The two-dimensional impact has pushed the Indian crude oil basket to an all-time high of Rs 7,723.68 a barrel on Thursday, when the exchange rate was Rs 67.71. This was at a time when the domestic basket price in dollar terms was seen at $114.07 a barrel, much below the all-time monthly average high of $132 a barrel in July 2008.
According to petroleum ministry estimates, for every rupee fall against the dollar, under-recovery on sales will increase by Rs 8,000 crore, while every dollar increase in crude oil prices would add Rs 4,000 crore. "If the current stage continues, it would push the overall under-recovery by oil marketing companies (OMCs) on sensitive petroleum products above Rs 200,000 crore," predicts a senior petroleum ministry officer. Early this financial year, when crude oil prices were around $99 a barrel and exchange rate was around Rs 54 to a dollar, finance minister P Chidambaram had predicted the under recovery figure would be Rs 80,000 crore this financial year.
For the second fortnight of August, the under-recoveries on diesel, kerosene and LPG stood at Rs 10.22 a litre, Rs 33.54 a litre and Rs 412 a cylinder, respectively, and are expected to rise further for the first fortnight of September. This is despite several measures like phase-wise diesel de-regulation, with a rise of 50 paise per month and a cap on the number of subsidised domestic LPG cylinders.
Above all, this has left the government and OMCs - Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum - with no other option but to go for a dramatic rise in price. "It is more a political call. However, a increase is vital for us," says an OMC official. If the government does not opt for a rise of at least Rs 5 a litre on petrol by the first fortnight of September, OMCs might begin to suffer under-recoveries on this decontrolled auto fuel too for the first time this financial year. Petrol prices could also inch closer to the Rs 100-mark, causing inflation fears.
For upstream majors like ONGC, it is also a gain-and-loss story. While the fall in rupee is set to add Rs 300-400 crore to their revenue, a lower retention price can affect these figures. ONGC, for instance, contributes $62.9 per barrel to meet the government's under-recoveries. This figure was determined when oil prices were $110 per barrel. Any rise in prices gives ONGC a bigger retention amount, while conversely, a fall in prices shrinks its realisations below $40 per barrel.
"Considering the current rupee value, one rupee fall in the Indian basket price would hurt us by more than Rs 1,000 crore," says A K Banerjee, director (finance), ONGC. But about 30 per cent of the additional revenue that the company gains from rupee fall gets minimised due to dollar payment for crude and other materials.
However, the crises in Syria and Libya may not be such a big cause of worry. India imported about 1.66 million tonne crude from Libya in 2012-13, while the supply from Syria was nil. The concern is more to do with the sentiments of West Asia and African suppliers. West Asia countries supply around 116 MT to India, while the African share is above 30 MT. "Hence a price rise or short supply, along with rupee depreciation, would increase the country's import bill too," Joshi believes. The country's oil import bill had zoomed more than 9 per cent to $169 billion in 2012-13.
The oil ministry has already lined up a master plan to reduce the oil import bill by $22 billion to narrow the country's current account deficit. One of the major steps lined up is to increase the imports from Iran, whom the country pays in rupee terms due to the US and European sanctions on that country. But India's roadmap would depend on where the international prices and rupee are heading. "If oil prices zoom above $150 a barrel, that would spell doom for our economy," Mishra adds.
