CRUDE Excess Supply to Lighten Burden of State-run Oilcos

CRUDE Excess Supply to Lighten Burden of State-run Oilcos 

Just as the equity markets the world over are threatening to enter a bear phase, the energy markets too seem poised to follow suit.
The European Brent crude oil prices have already fallen 20% — the benchmark for a bear market —from its peak in April this year. Although oil prices have gained in the past few days, the overall scenario bodes well for India and state-owned energy firms. At a time when everyone is revising global GDP growth outlook downwards, supply worries plaguing the oil industry have started diminishing.
Since economic growth and oil demand go hand in hand, lower GDP growth is leading to lower oil demand forecasts. In August, International Energy Agency lowered its global oil demand estimate by 0.2 million barrels per day (mbpd) for 2011. It also noted that supply rose by 1 mbpd.
Supplies in August rose mainly in the US and Latin America, while European output was constrained due to maintenance work in the North Sea. However, the quick recovery in production from a Gaddafi-less Libya appears the key factor in the sustained drop in oil prices last week. Libya is expected to achieve over three-fifths of its output capacity on stream by March ’12 — something that was not considered possible earlier. Iraq’s production is also expected to go up from 2012 as it plans to double output in three years. This will ultimately lead to other Opec countries cutting their output. However, the next Opec meeting is not scheduled until mid-December. A cut-back will also add to the reserve capacity of these countries, thus, helping ease the risk premium on oil prices. For India, lower oil prices will not only reduce the pressure on the country’s trade deficit, but also ease the government’s oil subsidy burden.
Increasing number of analysts have cut their forecasts for 2012 around $115-120 per barrel, slightly higher than the average of $110 in 2011 so far.
The direct beneficiaries will be the three state-owned oil marketing companies — Indian Oil, BPCL and HPCL — as their operational losses will go down. Similarly, the upstream majors ONGC, Oil India and Gail will see their burdens easing.