 "Oil exports feel the heat of currency fluctuation")
Post-Brexit uncertainty is likely to weigh on the performance of India’s exports and with petroleum being a substantial chunk of this, major players in the sector are likely to be impacted by Britain’s decision to exit the European Union. Though lower crude oil prices are likely to bring down the import cost for domestic refiners, currency fluctuation and lower product margin could turn out to be spoilers.
Reliance Industries Ltd (RIL) is the largest petroleum exporter from India. Diesel is its main export to Europe. For Indian Oil Corporation, the largest domestic retailer of petroleum products, the impact in terms of exports would not be much since it sends only small quantities of petrochemical products to Europe on sporadic basis, said an official.
“I do not expect any big slump in volume demand for exporters as a result of the Brexit because the entire market is small and fragmented. However, the development could have some negative impact on the crack spreads for some products like aviation turbine fuel (ATF) for petroleum product exporters,” said K Ravichandran, senior-vice president at research and ratings agency Icra.
Export of Indian petroleum products have been under pressure due to muted global prices. They were pushed to the fourth rank in terms of value at $30 billion in 2015-16, from the first previous year.
Sixty three per cent of RIL's petroleum product sales were to the export market in the fourth quarter ending March 31, 2016. It has remained in excess of 10 million tonne for three continuous quarters compared to 9.7 mt in the fourth quarter of 2014-15. The company weighs realisation in local and export markets and accordingly pushes products. The prevailing low prices, however, brought down its export earnings of petroleum products by 36 per cent.
An email sent to RIL did not get any response. Mangalore Refinery Petrochemicals Ltd, a subsidiary of Oil and Natural Gas Corporation, is the other significant exporter from India besides Essar Oil.
In response to a query, an Essar executive said the company does not export any product from its Indian refinery to Europe. The group’s overseas arm UK-based Essar Energy operates a 14 million tonne refinery in Stanlow there. This refinery feeds the British market in London and adjoining areas. "Given the 'leave' outcome, we do not expect any significant or specific impact on Essar Oil UK and Stanlow, other than any impact on the macro economy itself overall. We remain focused on building a sustainable and strong business," a spokesperson of Essar Oil UK said.
Ravichandran also said Brexit should be credit positive for the oil refining and marketing sector, as crude oil prices are expected to remain subdued in the near term due to heightened uncertainty about demand growth in the EU region. “This should translate to low under recoveries and working capital borrowings for the R&M companies, besides giving a leg up to petroleum products demand growth with possible roll back of consumer prices in the ensuing weeks. While INR could depreciate further against USD, which could partly neutralise the oil price decline, the net impact should be positive for the R&M companies.”
So long as oil prices are within $40-45 a barrel, as the recent oil price rally was resulting in higher cess incidence, he said.
Kalpana Jain, partner, Deloitte, however, says the fall will be a shortlived phenomenon as core oil fundamentals remain unchanged. “Oil prices have been range bound in the last three weeks above $45 a barrel and a stronger demand and supply outlook has elevated prices in the last one month or so on the back of supply disruptions helping to curb inventory build-up in the US.”
The uncertainty surrounding the British and European economies have depressed the pound and the euro and Brexit verdict has strengthened the US dollar which turn suppresses crude prices which is traded in USD making it more expensive in other currencies, she said. The shift from an oversupplied to a balanced market – which is presently underway – may overcome the impact of slightly weaker demand due to currency effects. “While a Brexit may result in further sentiment-driven price declines, the weakness is likely to be temporary. Given our large import basket, for India lower crude prices help but stronger dollar offsets those gains.”
Reliance Industries Ltd (RIL) is the largest petroleum exporter from India. Diesel is its main export to Europe. For Indian Oil Corporation, the largest domestic retailer of petroleum products, the impact in terms of exports would not be much since it sends only small quantities of petrochemical products to Europe on sporadic basis, said an official.
“I do not expect any big slump in volume demand for exporters as a result of the Brexit because the entire market is small and fragmented. However, the development could have some negative impact on the crack spreads for some products like aviation turbine fuel (ATF) for petroleum product exporters,” said K Ravichandran, senior-vice president at research and ratings agency Icra.
Export of Indian petroleum products have been under pressure due to muted global prices. They were pushed to the fourth rank in terms of value at $30 billion in 2015-16, from the first previous year.
Sixty three per cent of RIL's petroleum product sales were to the export market in the fourth quarter ending March 31, 2016. It has remained in excess of 10 million tonne for three continuous quarters compared to 9.7 mt in the fourth quarter of 2014-15. The company weighs realisation in local and export markets and accordingly pushes products. The prevailing low prices, however, brought down its export earnings of petroleum products by 36 per cent.
An email sent to RIL did not get any response. Mangalore Refinery Petrochemicals Ltd, a subsidiary of Oil and Natural Gas Corporation, is the other significant exporter from India besides Essar Oil.
In response to a query, an Essar executive said the company does not export any product from its Indian refinery to Europe. The group’s overseas arm UK-based Essar Energy operates a 14 million tonne refinery in Stanlow there. This refinery feeds the British market in London and adjoining areas. "Given the 'leave' outcome, we do not expect any significant or specific impact on Essar Oil UK and Stanlow, other than any impact on the macro economy itself overall. We remain focused on building a sustainable and strong business," a spokesperson of Essar Oil UK said.
Ravichandran also said Brexit should be credit positive for the oil refining and marketing sector, as crude oil prices are expected to remain subdued in the near term due to heightened uncertainty about demand growth in the EU region. “This should translate to low under recoveries and working capital borrowings for the R&M companies, besides giving a leg up to petroleum products demand growth with possible roll back of consumer prices in the ensuing weeks. While INR could depreciate further against USD, which could partly neutralise the oil price decline, the net impact should be positive for the R&M companies.”
So long as oil prices are within $40-45 a barrel, as the recent oil price rally was resulting in higher cess incidence, he said.
Kalpana Jain, partner, Deloitte, however, says the fall will be a shortlived phenomenon as core oil fundamentals remain unchanged. “Oil prices have been range bound in the last three weeks above $45 a barrel and a stronger demand and supply outlook has elevated prices in the last one month or so on the back of supply disruptions helping to curb inventory build-up in the US.”
The uncertainty surrounding the British and European economies have depressed the pound and the euro and Brexit verdict has strengthened the US dollar which turn suppresses crude prices which is traded in USD making it more expensive in other currencies, she said. The shift from an oversupplied to a balanced market – which is presently underway – may overcome the impact of slightly weaker demand due to currency effects. “While a Brexit may result in further sentiment-driven price declines, the weakness is likely to be temporary. Given our large import basket, for India lower crude prices help but stronger dollar offsets those gains.”
