Indian oil sector to remain largely unfazed by WTI crash

Indian oil sector to remain largely unfazed by WTI crash

Domestic firms may gain from price fluctuation, say analysts

The world on Monday woke up to the news that oil prices in the US had slipped into the negative, sending the traders into a tizzy. But Indian refiners will remain largely unfazed by the price crash in West Texas Intermediate (WTI) crude oil prices.

WTI is a marker that reflects the price of crude oil in the American market. Crude purchases by India’s domestic oil companies are priced closer to the Brent markers, which reflect prices in the Gulf region.

According to Indian Oil Corporation Ltd, India’s largest public sector refiner, “The sharp decline in crude oil prices, ultimately plunging WTI into a historic minus $37.63 a barrel yesterday (on Monday), was a result of panic selling on May 20 delivery contracts a day before its expiry date, failing which the delivery would have been necessarily amid Covid-19 related demand destruction and the storage constraints at Cushing, Oklahoma. However, WTI futures for June 20 as well as ICE Brent for May 20 are still trading at around $16 a barrel and $ 21 a barrel respectively.”An one-off incident

Explaining the situation, an executive from of one of the public sector oil companies said this is an one-off incident restricted to one region. “Yes, it will have implications. But on oil exploration and production companies and not refiners,” the executive said, adding that the US crude oil producers are now facing the heat.

In fact, according to analysts, domestic companies may gain from this price fluctuation.

“Indian oil marketing companies (OMCs) are likely to react positively to fall in crude prices. Currently, OMCs are making ₹13 a litre net marketing (margin) on petrol and diesel, which will likely improve on a fall of crude prices,” said Yogesh Patil, Research Analyst at Reliance Securities. According to Patil, a $1 a barrel fall in crude prices leads to a ₹0.45 a litre improvement in net marketing margins on petrol and diesel.

“Current net marketing margins on petroleum products are around 7 times their normal margins,” he added.

But the outlook for crude oil is expected to remain grim.

MirenLodha, Director, Crisil Research on Oil Prices said, “Crude oil demand is expected to decline by over 20 million barrels per day (mbpd)in April alone. Typically, monthly global demand is around 100 mbpd…Consequently, we expect Brent oil prices to be in the ~ $25-30 range for the second quarter while increasing marginally in the last 2 quarters of 2020. The gigantic inventory build-ups and lack of storage facilities would also put pressure on prices. Overall, Brent could average $30-35 in 2020, with a strong downward bias.”

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