Oil price in India not to change for now

In the first signs of good news on the crude front in many months, oil dramatically went off the boil on Tuesday, falling by a steep $6.44 a barrel on Nymex (New York Mercantile Exchange), the sharpest decline in a single trading session in dollar terms in 17 years.

On Wednesday, crude fell another $2.03 a barrel from Tuesday’s close to $136.71 for European contracts at the time of writing. This is quite a decline from Friday’s record of $147.27 a barrel.

The slide had set in on Tuesday when oil plunged $6.44 a barrel to $138.74 in a volatile trading session. The price had swung from a high of $146.73 a barrel to a low of $135.92.

In a clear indication that crude prices still remain linked to speculation and the US economy, and not increased demand from India and China, as alleged by some, market watchers said oil’s slide was sparked by fears of a drop in demand in America on fears of a slowdown and a rising oil stockpile in the US.

Consumer prices in the US have risen 5% from a year ago and recorded the biggest monthly jump since 1982. Already, motor fuel demand has dropped 5%. The demand squeeze is only expected to worsen, as has been indicated by Federal Reserve chairman Ben Bernanke.

The steep fall in the oil price coincided with Bernanke’s semi-annual forecast to US Congress, in which he said there was a ‘‘high degree of uncertainty” about the US economic outlook. The slide started while Bernanke was speaking on the television.

Market fears were also intensified by the latest forecast by OPEC, which accounts for 40% of global oil supplies. The cartel of oil exporting nations said world demand will rise by 900,000 bpd (barrels per day) next year, which is 100,000 lower than what is being seen this year.

For the Indian consumer, however, this will translate to lower prices only if the declining trend continues for some months to pull oil down to $100-a-barrel level, experts said. It is too early to say whether the drop in price in the past two days is the beginning of a decline which could see oil settling in range of, say, $100-125 a barrel.

There are too many factors, besides fears of demand slowdown and changes in the dollar value, that impact global oil trade. For example, escalation in tensions between the US and Iran, attack on facilities in big producer country like Nigeria or major disruption in global refining capacity due to breakdowns or hurricanes could spark speculation and another rally.

Fuel prices in India, however, will not change for either consumers or oil companies in the immediate future for two reasons. One, because any change in oil price on Nymex hits our shores only after about a fortnight. Two, present retail prices correspond way below Tuesday’s closing price of crude.

On Tuesday, for example, the mix of crude India buys, which is lower than Nymex quotes, stood at $136.97 a barrel against $138.74 on Nymex. On Monday, the Indian mix had stood at $140. For July, the Indian mix has been averaging $138.74. Against this, the present pump prices correspond to roughly $123-125 a barrel of Indian mix. Thus, a big gap still remains.

This means in terms of Indian mix, crude prices have risen from $123-25 a barrel to $138. In their latest forecast, state-owned oil marketing companies reckon they will close the year with a loss of Rs 222,785 crore.

They are still losing Rs 16.70 on petrol, Rs 27.61 on diesel, Rs 38.09 on kerosene and Rs 338.53 on cooking gas. But if trend continues, then there will be less pressure on government to raise prices and oil companies can hope to arrest further losses.

Courtesy :- Economic Times


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