Talking to ET Now, Vikas Halan, Moody's Investors, says oil prices going up is not a given. It is going to remain volatile. It is partly driven by geopolitical risks and when things cool down, the oil prices will also come down.
Are geopolitical factors the only thing which is pushing crude prices back above $70? Fundamentally speaking, the demand is still weak. Shale gas is real now and historically in 2015 and 2016 every time crude prices have gone above $55-$60 per barrel, the shale gas producers have quickly pump in supply?
Yes, primarily there are geopolitical risks. You have highlighted most of the factors but one factor that I would like to add is weakness in US dollar. With trade discussions between US and China, there has been some weakness in the US dollar which also tends to increase the crude oil prices which is US dollar denominated.
Both those factors geopolitical is the primary. Go back to pre 2014 when oil prices used to be $100. Anything to do with Middle East would spike oil prices by anywhere between $10 and $15 per barrel.
The current run is not very dissimilar. The other thing to note is the difference between WTI and Brent, the Brent is at $70-72 whereas WTI remains at $66. There is still that $6 gap which has widened. Now, as you have mentioned, the Shale oil production is going up. It is now at its highest ever and it is going to continue to grow with the current oil prices supporting the production level and the production level will come in next six months.
So, by combining that increase in supply with possible reduction in demand because of increasing prices, we can see a softer second half this year. Our house view is still that most of our ratings will have to withstand $45 to $65 oil price range. We have not moved away from the lower band of the oil price which used to be $40 and recently moved up to $45 but we still maintain the range at $45-65.
What is going on with the OMCs, considering we are grappling with this recent fear of controlling prices again? What is your take on the entire issue although a clarification came from the Indian petroleum minister just yesterday that he has not given out or sent any direction to any of the OMCs to tamper with petrol or for that matter diesel prices? Is this getting to be a tricky space as an investment opportunity?
Our view on the deregulation issue was that it was positive and we understood at the time that when excise duty was increased to compensate for the price decline, that was to be the buffer and that was to be the mechanism for the government to adjust the prices, if it needed to.
The new part of that equation is that GST collection has not been as high as the government expected, reducing governments wiggle room to reduce that excise duty. It could be a way to think about this and could be the opportunity to kill two birds at one stone where by removing excise duty and bringing the petroleum products under GST, there could be an opportunity for the government to look at this issue afresh.
We believe if you bring the petroleum product under GST, that could streamline both the processes but for the OMCs particularly, Re 1 per litre would mean $1.9 billion of loss for the entire year, given what the consumption has been for diesel and petrol.
If you put that into context, it is about Rs 12,400 crore. For April to December period, the three OMCs have reported a total profit after tax of about Rs 25000 crore. If this Re 1 is extended for the full year, you are talking close to 50% of their entire nine months profit after tax will be gone. We do not expect this to last for full one year. There could be a maximum impact of one quarter or may be even couple of months before which the government takes a call on reducing the excise duty. Also, let us not forget oil prices going up is not a given. It is going to remain volatile. It is partly driven by geopolitical risks and when things cool down, the oil prices will also come down. When the US production data comes out, oil prices will also soften a bit.
Clearly there is a lot of uncertainty in the oil markets as has always been the case. Do you think with Aramco aiming at a price of $80 a barrel ahead of their IPO; US-Russia tensions coming to the fore and Russias influence in the oil markets lifting sentiment, where would the prices go from here? I know you put the range between $65 and $70, but do you think that one could be surprised on the upside for next 12 months?
Short periods of upside cannot be ruled out, if geopolitical tensions in Middle East escalate further. The consequent impact could last as long as the tensions last but we believe the fundamentally, the oil market is not what it was pre 2015. Things have structurally changed. The production level that used to be dominated by OPEC is no longer the case.
Plus, US Shale production is now the largest component of the global incremental production. Therefore, we think the control that OPEC used to have, is no longer the case, especially if Russia actually falls under sanctions. That would actually take out a very big chunk of the oil supply. So, the control that OPEC had in the past over the price is no longer as strong. Therefore, we continue to stick to $45-$65 range.