Oil prices around the globe have been on a tear. One of the issues for Indian oil companies is their requirement to sell below market to subsidize prices in their home country. Indian producers have the capability to sell their oil around the globe, and with prices of Brent oil moving above $80 per barrel, Indian oil producers should experience robust gains.
Last week, the Indian top Finance Minister said that the Indian government’s request to PSUs to subsidize petroleum and diesel prices by 1-Rupee per liter was a onetime request and the government does not intend to ask them to generate this subsidy again. It now appears that marketing companies will continue to experience market freedom and upstream oil companies will not be asked to share in the burden of oil subsidies.
Additionally, the government cut its duty on petroleum and diesel by 1.5 Rupees per liter and requested that state-owned oil marketing companies assist in reducing the price of fuel by subsidizing both petroleum and diesel by 1 Rupee per liter.
The issue for the government and for customers is that as the price of oil rises, the subsidies need to be increased to keep the price stable. Since the goal is stability and not profits for state owned oil companies, there is a feeling amongst market participants that OMC will be asked to subsidize fuel prices again despite the comments from the government.
Credit Rating Agency’s Take Notice
The share prices of state-owned oil companies are declining and should continue to face downward pressure until investors are sure that the government will not ask them to participate in the reduction of the country’s fuel costs. The market cap of the largest government owned oil companies has declined which is credit negative for oil companies because of their high levels of cross company share holdings.
What is Happening to Oil Prices
Brent oil, which is a global benchmark, has pulled back slightly after hitting fresh 4-year highs at $86.72. You can track crude oil prices in iFOREX. Prices have dipped approximately 5% since hitting those highs in early October.Brent has been driven by concerns over supply disruptions and robust demand. Supply could be curtailed beginning on November 1, 2018 as the US re-institutes sanction on Iran. The US pulled out of the agreement earlier this year as President Trump claimed he was looking for a better deal.
While prices have come off the dearth of supply outside the United States could lead to further price spikes. This creates additional problem for the Indian government as they continue to attempt to subsidize oil prices.
Demand is solid, and continues to grind higher. The US Energy Information sees global demand continuing to rise slightly over the next 2-years. So the real swing factor is supply which at the moment is being driven by fears that Iran will need to take approximately 1.5 million barrel of crude oil off the market beginning November 1, 2018.
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