SECTOR ANALYSIS: PETROLEUM INDUSTRY

Refining Industry Faces Hard Times as Global Growth Cools

Crude oil prices have remained volatile through the last quarter amid growing global economic uncertainty. Worries about the pace of economic growth on one hand and rising hopes of a Libyan production recovery on the other have weighed on oil prices. Consequently, average Brent crude oil price ruled some 4.2% lower in the September quarter from the June quarter. It had fallen over 20% from its peak in April 2011 indicating a ‘bear market’. However, the prices later recovered. In the last week of June, the government reduced various duties and increased diesel and LPG prices marginally to help bring down the local oil industry’s losses. However, the rupee’s depreciation in September is likely to increase the burden further. The performance of the stateowned oil companies in the September quarter will, therefore, be again dependent on government aid. Reliance Industries’ results showed signs of a slowing growth that had investors worried over a possible phase of stagnation. Similarly, Petronet LNG’s stock fell although it doubled its September quarter net profit on fears that further growth will be difficult to come by. Heavy rupee depreciation led to a forex loss of 352 crore forMRPL impacting its profits. 

The refining industry could be entering a long phase of downturn if global economic growth continues to cool off, as 2012 and 2013 are likely to see substantial capacity addition. Substantially lower prices of WTI crude oil will help shield US refiners, but European refiners could see a number of closures in the coming months.
The industry’s performance on the stock market continues to remain subdued. While industry leader RIL suffers from its own woes, ONGC’s performance has been languishing due to government’s followon public offer plans. Similarly, Cairn was hit by the hangover from the Vedanta deal. Natural gas major Gail has fallen due to worries over volume stagnation after domestic natural gas production continued to dwindle.