Crude oil prices rose to $116 per barrel on March 2, 2011, the highest level in more than two years. Political unrest in Middle East and North Africa (MENA) - that is raising a larger concern over disruption in Organization of Petroleum Exporting Countries (OPEC) oil supplies from the region could fuel further price increases. The sharp increase in global crude oil prices will improve the realisations of private oil exploration and production companies, and the margins of refining companies in India.
Government-owned oil companies, on the other hand, will have to contend with a heavier subsidy burden that will curtail profit increase.
Political unrest in Middle East and North Africa has led to a sharp upswing in crude oil prices since the last week of January 2011. Protests in Libya have sparked concerns that the violence might spread to neighbouring countries such as Saudi Arabia and Iran. Many oil companies are suspending operations in Libya.
Some of them have also begun evacuating their expatriate employees from there. Dwindling crude oil supplies from Libya - which accounts for 2 per cent of global oil production and 2.1 per cent of global oil exports - are therefore pushing up crude prices. On March 2, 2011, crude oil prices rose to $116 per barrel.
"Middle East and North Africa, where major OPEC countries are located, meet 40 per cent of world crude oil consumption and hold more than 65 per cent of proved oil reserves,"points out Sridhar Chandrasekhar, Head, CRISIL Research.
"In a year when we expect world dependence on OPEC oil supply to increase, concerns over a wider disruption of supplies from OPEC countries will fuel further oil price increases."
The surging crude oil prices will however bring cheer to oil exploration and production companies in India's private sector as their realisations will increase significantly. Average crude oil prices (Dated Brent) are likely to rise by more than 15 per cent to over $102 per barrel in the fourth quarter of 2010- 11, compared to the previous quarter.
Private and government-owned refining companies too will benefit. CRISIL Research expects gross refining margins to rise from $6.8 per barrel in the third quarter of 2010-11 to $8-9 per barrel in the fourth quarter.
Government-owned oil exploration and marketing companies will not benefit as much, as they will have to shoulder an increase in subsidy burden on account of the rising oil prices. The subsidy burden also termed as under-recoveries - the losses incurred on selling petroleum fuels at less than their cost price - will increase significantly to more than Rs 300 billion in the fourth quarter, from Rs 155 billion in the previous quarter.
Total under-recoveries for 2010-11 will exceed Rs 750 billion. The rising under-recoveries will clip the extent of profit increases for government-owned oil companies. "Based on the subsidy-sharing pattern since 2006-07, we expect the government to absorb at least 50 per cent of the under-recoveries. Upstream public sector oil companies will meet about 33 per cent of the under-recoveries, and OMCs will absorb the remainder as marketing losses," adds Sridhar Chandrasekhar.
