Crude oil prices have been on a secular downtrend for the past couple of months owing to the downside risks facing the global economy and rising hopes of Iran tensions easing. The weakness is likely to persist in the near term. However, there is an emerging consensus that oil prices are bound to go up in a year or so. India, which is staring at the prospect of a sovereign downgrade, risks losing out unless it takes advantage of the low oil prices now.
The Indian basket of crude oil, at $94 per barrel, is now 25% lower than what it was at its peak in March 2012, thanks to growing concerns over Eurozone crisis and a weak global economic outlook and resultant lower demand expectations.
Concerns over Iran’s nuclear ambitions persist even after three rounds of discussions, but the promise to continue the dialogue on July 3 is considered a positive. Since this coincided with ample availability of crude oil in global markets and a lack of monetary booster from the US Federal Reserve in the form of a QE3, prices have eased.
The scenario is not expected to change dramatically in the near term although world oil demand is projected to increase slightly during the second half of 2012. “This rise in demand is expected to be mostly offset by the projected increase in non-OPEC supply,” noted the Organisation of Petroleum Exporting Countries in its recently concluded conference.
OPEC has said that, in addition, comfortable stock levels — which are above the historical norm in terms of days of forward cover — indicate that there has been a contra-seasonal stock build up in the first quarter of 2012. This overhang is expected to continue throughout 2012, it said. OPEC's assessment is that stocks outside the OECD region have also risen. Taking these developments into account, the second half of the year could see a further easing of fundamentals, despite seasonally higher demand, it said.
Yet, there is a growing consensus that it will not be long before crude oil prices move northward again. Although demand growth forecasts are made against the backdrop of muted economic growth, there could be surprises, says the International Energy Agency (IEA), which represents oil consumers.
A lower GDP sensitivity this month illustrates downside demand risks, but upside potential exists too, amid uncertainty over summer power sector oil demand and non-OECD stockpiling, it says. The energy industry watchdog expects demand to grow 0.82 million barrels per day (mbpd) to an average 89.9 mbpd in 2012.
One of the key reasons of a growth in demand will be increased refinery activity. World refinery crude demand is set to surge seasonally by 2.8 mbpd between April’s low and August, as maintenance at refineries winds down.
US-based investment bank Goldman Sachs too is bullish on crude oil for the next one year. Oil falls under its top commodity picks according to its latest report. Returns may be 41% in a year for energy investments, it says, while adding that the oil market is tightening. A significant change in crude oil prices could be a scary scenario for India, which imports 84% of its requirement and heavily subsidises its domestic retail sales.
Even at current prices, the three state-run oil marketing companies (OMCs) are losing . 446 crore daily. In FY13, under-recoveries could be as high as . 1,66,000 crore if there is a status quo, further strengthening the case for deregulating the retail prices of fuel to take advantage of low crude prices now.
The Indian basket of crude oil, at $94 per barrel, is now 25% lower than what it was at its peak in March 2012, thanks to growing concerns over Eurozone crisis and a weak global economic outlook and resultant lower demand expectations.
Concerns over Iran’s nuclear ambitions persist even after three rounds of discussions, but the promise to continue the dialogue on July 3 is considered a positive. Since this coincided with ample availability of crude oil in global markets and a lack of monetary booster from the US Federal Reserve in the form of a QE3, prices have eased.
The scenario is not expected to change dramatically in the near term although world oil demand is projected to increase slightly during the second half of 2012. “This rise in demand is expected to be mostly offset by the projected increase in non-OPEC supply,” noted the Organisation of Petroleum Exporting Countries in its recently concluded conference.
OPEC has said that, in addition, comfortable stock levels — which are above the historical norm in terms of days of forward cover — indicate that there has been a contra-seasonal stock build up in the first quarter of 2012. This overhang is expected to continue throughout 2012, it said. OPEC's assessment is that stocks outside the OECD region have also risen. Taking these developments into account, the second half of the year could see a further easing of fundamentals, despite seasonally higher demand, it said.
Yet, there is a growing consensus that it will not be long before crude oil prices move northward again. Although demand growth forecasts are made against the backdrop of muted economic growth, there could be surprises, says the International Energy Agency (IEA), which represents oil consumers.
A lower GDP sensitivity this month illustrates downside demand risks, but upside potential exists too, amid uncertainty over summer power sector oil demand and non-OECD stockpiling, it says. The energy industry watchdog expects demand to grow 0.82 million barrels per day (mbpd) to an average 89.9 mbpd in 2012.
One of the key reasons of a growth in demand will be increased refinery activity. World refinery crude demand is set to surge seasonally by 2.8 mbpd between April’s low and August, as maintenance at refineries winds down.
US-based investment bank Goldman Sachs too is bullish on crude oil for the next one year. Oil falls under its top commodity picks according to its latest report. Returns may be 41% in a year for energy investments, it says, while adding that the oil market is tightening. A significant change in crude oil prices could be a scary scenario for India, which imports 84% of its requirement and heavily subsidises its domestic retail sales.
Even at current prices, the three state-run oil marketing companies (OMCs) are losing . 446 crore daily. In FY13, under-recoveries could be as high as . 1,66,000 crore if there is a status quo, further strengthening the case for deregulating the retail prices of fuel to take advantage of low crude prices now.
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