Monthly Oil News Commentary: December 2016 – January 2017
India’s petroleum consumption has been in the limelight for some time now. This month was no different. According to the Ministry of Petroleum, India’s fuel consumption is expected to touch 200 MT FY17. In FY16 India’s fuel consumption grew at 10.9 percent to 183.5 MT. In 2016 consumption of petroleum products was 750 MT in the United States and 500 MT in China.
It was also reported that the government was in advanced stages of awarding oil and gas blocks under the new HELP. The launch of the national sedimentary data repository is expected to provide the new exploration policy an additional thrust and help to ramp up output.
In FY17 a 60 MTPA refinery is expected to be built by the three PSU oil firms, IOC, BPCL and HPCL on the West coast. The companies have already signed an initial pact to construct the refinery at a cost of $30 billion. IOC will have the major share of 50 percent. The oil ministry concluded the auction of 67 Discovered Small Fields in FY16 where a bulk of the participation came from new entrants. The auctions witnessed 134 e-bids from 42 companies. One of the expectations in the oil industry is an increase in oil prices on account of the OPEC decision to cut output by 1.2 MBPD. Some expect a decrease in excise duty on fuel in the budget for FY18. An increase in petroleum prices is also expected to increase the petroleum subsidy budget for FY18 and also affect oil company balance sheets.
Some of the milestones in the oil industry for FY17 included Russia’s oil major Rosneft’s decision to acquire Essar Oil and its Vadinar refinery at over $10 billion and the launch of Ujjwala Yojana that aimed to provide 50 million LPG connections to BPL families with a support of Rs 1,600 per connection in the subsequent three years.
The government was reported to have ruled out the system of subsidising petroleum but has said that it may reduce excise duties if oil prices continued to increase. Though the government has claimed that it has passed on 50 percent of the reduction in oil prices to consumers the retail price of petroleum products has remained the same as it was when crude oil price was three times its current prices.
When oil prices fell in the second half of 2014 and early 2015, the government hiked excise duty on petrol and diesel nine times to increase its take that helped the government meet its revenue and fiscal deficit targets. In all, it raised excise duty on petrol by Rs 11.77 a litre and that on diesel by Rs 13.47. For every dollar increase in the price of a barrel of crude oil India’s import bill increases by over $1.3 billion. India spent $63.96 billion on crude oil import in FY16, about half of $112.7 billion outgo in the previous fiscal and $143 billion in FY14. For the current fiscal, the import bill has been pegged at $66 billion at an average import price of $48 per barrel.
HSBC forecast that India’s trade position of petroleum products in the country’s imports could fall from the current second place to third place between 2015 and 2030. Petroleum products fall from India’s second largest import to third largest over the forecast period, behind industrial machinery and mineral manufactures. This is in line with the government’s focus to raise the share of manufacturing in GDP to 25 percent from 14 percent currently.
Rest of the World
The IEA said that global oil prices would witness much more volatility in 2017 even if markets rebalance in the first half of the year if output cuts pledged by producers are implemented. OPEC agreed to cut output by 1.2 MBPD to 32.5 MBPD for the first six months of 2017, in addition to 558,000 bpd of cuts agreed by independent producers such as Russia, Oman and Mexico. The IEA expects US shale oil to increase production this year.
According to a poll by Reuters oil prices will gradually rise toward $60/bbl by the end of 2017 with further upside capped by a strong dollar, a likely recovery in US oil output and possible non-compliance by OPEC with agreed cuts. Brent crude futures is expected to average $57.43/bbl in 2017. The current forecast is marginally higher than the $57.01 forecast in the previous survey.
Average Brent prices are expected to improve with each subsequent quarter, starting with $53.88 in the first, to $56.61 in Q2, $58.79 in Q3 and $59.68 in the fourth quarter. Brent has averaged about $45 per barrel in 2016.
MT: Million Tonnes, FY: Financial Year, HELP: Hydrocarbon Exploration and Licensing Policy, MTPA: Million Tonnes Per Annum, MBPD: Million Barrels Per Day, BPL: Below Poverty Line, LPG: Liquefied Petroleum Gas, bbl: barrel, IOC: Indian Oil Corp, BPCL: Bharat Petroleum Corp Ltd, HPCL: Hindustan Petroleum Corp Ltd, PSU: Public Sector Undertaking, GDP: Gross Domestic Product, IEA: International Energy Agency, OPEC: Organization of the Petroleum Exporting Countries