From close to $100 a barrel in mid-2014, world crude oil market prices have collapsed to less than $40 a barrel by end-2015. To crystal-gaze into the future and come up with likely scenarios a high-powered panel got together under the FPJ-IMC Forum on “Global Crude Oil Market and its Implications for India”. This forum was jointly organised on January 27, 2016 by Economic Research and Training Foundation (ERTF) of Indian Merchants’ Chamber (IMC) in association with The Free Press Journal (FPJ).
The panelists included (in alphabetical order) G. Chandrashekhar, Economic Advisor, IMC and Director IMC-ERTF; S. Raghunath, President (Oil Division), Trafigura India Pvt Ltd; Madan Sabnavis, Chief Economist, CARE and Sukrit Vijaykar, Trifecta Consultants. The discussion was moderated by R N Bhaskar, Consulting Editor, FPJ.
Unabated production, large inventory and demand concerns have combined to paint a dismal picture on the price front. The sentiment is bearish. How long will the sentiment last and importantly, what are the implications for India in terms of CAD, inflation, consumption demand and so on?
Despite the large price drop since late 2014 and expectation of supply response to prices, in 2015 the world supply growth was up 2.6 million barrels per day (mbpd). High stock builds continued at the rate of 1.8 mbpd. Clearly, there is at present the burden of over-supply in the market which will surely need time to work-off, according to G. Chandrashekhar, Director, IMC-ERTF.
There was a panel discussion organised by the FPJ-IMC Forum on 27 January at the Indian Merchants Chamber (IMC) on “Crude Oil Market Outlook and Implications for India”. Shown in the picture above are (L to R) are G. Chandra shekhar, Director, IMC-ERTF; Madan Sabnavis, Chief Economist, CARE Ratings; Sukrit Vijaykar, Founder, Trifecta Consultants; S. Raghunath, President (Oil Division), Trafigura India; R.N.Bhaskar, Consulting Editor, Free Press Journal; Dilip Piramal, President, IMC, Tanil R. Kilachand, Co-Chairman, IMC-ERTF; Arvind Pradhan, Director General, IMC; and Jitendra Sanghvi, Deputy Director General, IMC. |
As for supply outlook in 2016 and 2017, Chandrashekhar asserted that events that contributed to supply growth in 2015 may not be repeated in 2016. He forecast a near-imminent supply reduction from non-OPEC sources due to low prices. The panelist said the market may start the process of rebalancing towards Q4 this year. .
“In sum, expect crude prices to recover from sub-30 levels to test $ 40 a barrel by Q4 this year”, Chandrashekhar said adding that at some inflection point, speculative funds will move on the long side to test the upside price potential. In the longer term, he foresaw a prolonged period of low prices due technological advances.
Despite India’s proven oil reserves, it remains a net importer of energy, he said adding that oil imports constitute about 78.6 percent total domestic oil consumption while gas imports constituted 25 percent in 2014-15.
Raghunath pointed out that India’s oil product balance showed the country was a net exporter of all products except LPG. “India is a swing buyer and seller due to advantage of location”, he asserted.
On the oil and gas industry’s expected growth, he pointed out that continuous exploration of blocks and increasing natural gas pipeline network on the supply side and booming automobile industry on the demand side will propel the energy industry’s prospects higher.
Quoting international agencies on supply and inventory, Sukrit Vijayakar attributed the price fall to excess of supply over demand and uncertain economic scenario, particularly in China. “From a fundamental perspective, there appears to be no reason for prices to rise this year”, he asserted adding that the world crude market was deeply impacted by speculative funds.
Presenting a technical chart, Vijayakar said in the short-term, strong resistance was seen at $ 40-42 while $ 55-65 zone presented a medium term resistance. “It is likely that prices have made an intermediate bottom and if prices fail to cross the short-term resistance at $ 40, then there is the possibility of a further decline to $ 19 before reversing sharply higher”, he said.
Madan Sabnavis while suggesting that the benefit of falling global crude oil prices has not reached consumers in full measure, stated that the current account would be positively impacted with a 20 percent decline in import bill, assuming unchanged consumption. Growth in refinery product exports will be affected as they account for around 20 percent of the country’s exports, he pointed out.
“Lower crude prices will provide room for further reduction in subsidy and the government can concentrate on rationalization of the same for LPG and kerosene”. The panelist remarked that petro products account for 45-50 percent of Centre’s excise duty collections and 7-9 percent of customs duty collections. A decline in oil prices should result in a decline in tax collection on petro products. Consensus emerged that world crude oil prices may not stay at the current low levels for long.
