Politics rather than economics play a dominant role in determining the prices of this commodity .The rise in the prices of crude in 2011 again illustrates this point suitably enough. Brent crude oil prices have consistently remained over USD 100 per barrel since march 2011, Which sadly has nothing to do with a significant increase in demand .Rather, we find that the global oil demand has continuously been revised downward .The international energy Agency (IEA), in the recent monthly market report, lowered the global demand of crude oil by 0.2 million barrels per day (MBPD) TO 90.3 MBPD, it’s fourth cut for the 2012 forecast .The rise in prices was more due to a disruption in supply from middle east and north African (MENA) countries flowing political unrest there .
However, we believe that in terms of supply, things will normalize by the second half of 2012.Moreover, OPEC alone is investing around USD 300 billion in the next five year, which will improve the spare capacity leading to softening of crude prices in 2012,Nevertheless we cannot expect the fall in crude prices to be sharp as we saw in 2008 ,on account of an increase in the break even cost of crude oil ,which is about USD 80-90 per barrel .Therefore in the absence of a robust demand ,we expect the prices to be in the range of breakeven (USD- 80-90/bbl)levels unless there is any significant change in the equilibrium either due to demand destruction of the breaking up of the euro or any unforeseen political upheaval that cause supply disruption .”Apart from the European crisis concern over Iran’s nuclear program will also dominate sentiments, says Deo.
When we try to gauge the higher range of the crude prices, we find that according to Citi report USD 120 per barrel is a pain point (Thought it is dynamic and will change with moment of USD )When expenditure on energy would consume about nine percent of the global GDP. Historically, this has proved to be recessionary for the world economy, and we believe that any increase in prices about that will trigger more supply from the spare capacity that is currently at MBPD, leading to downward pressure on crude prices. Hence we feel that the international markets crude oil prices will trade in the range of USD 80-120 IN 2012.
Whatever happens globally ,on the domestic front we cannot expect the prices to be in the range as we suffer from one extra risk point ,which is the INR’s movement against the USD .The rupee has already depreciated by almost 18 percent year till date ,with most of that happening in the last four months. A depreciating rupee adversely impacts downstream companies like HPCL, BPCL, etc. and positively impacts upstream companies like ONGC. Since fuel prices are yet to be fully decontrolled, any increase in crude prices increase and under recovery and subsidies that will impact the oil marketing companies adversely.
In the current scenario it is estimated that for every 1 depreciation against the dollar, the under recoveries of state run of marketing companies increase by approximately 8400 crore and the net of impact bills goes up by 9000 crore .We believe that in 2012, the prices are going to be more stable than in 2011 and are likely to hover around USD 100 per barrel. However this sector is still dominated by the state owned companies and the absence of any clear policy guidelines in term of implementing the Kirti Parikh report on de-regulating the sector will make returns from it is sector uncertain as the government can change its sharing burden.
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