Trade with Commodities: Oil climbs to 6-month high of $63

Wednesday, May 27, 2009

Oil climbs to 6-month high of $63

Rising crude may pose a threat to policy reforms in India; Opec won't cut supply

THE sharp run-up in crude oil prices in recent weeks could prevent the government from biting the bullet of reform just yet to ease the pain of fuel marketing companies which are selling petroleum products are subsidised rates.
    The government is said to be considering a host of reforms, including allowing auto fuel to be sold at market rates, but these plans are being threatened as crude oil prices soared their highest level this year on Wednesday.
    Benchmark crude futures for July delivery on the New York Mercantile Exchange (Nymex) have risen by 54% since January to $63.14 per barrel.
    "The decontrol of fuel prices is a sensitive issue in India and the government may not immediately touch it now as it may be perceived as 'anti-Aam Aadmi.' The freeing of petrol prices would lead to an increase of Rs 2 at petrol pumps at current prices," said an analyst with an international brokerage firm.
    If crude oil prices hit $70 per barrel, it could threaten economic recovery in industrialised countries and if it crosses $80, it could affect emerging markets as well, industry experts fear.
    Oil prices have been through a sharp cycle over the past year. From a peak of $147 per barrel in July 2008, the price dropped to $32.40 in December 2008. When the government last cut prices by 11% in January, it had used a baseline crude basket price of $57-$60 per barrel.
    Rising crude oil prices have begun taking their toll on oil marketing companies after a brief respite between January and March. According to India's top oil marketer Indian Oil Corporation, fuel retailing companies have been incurring losses Rs 1.54 for every litre of petrol they sell, Rs 11.80 per litre of kerosene and Rs 88 for every LPG cylinder.
    Debjyoti Chatterjee, assistant vice-president of Admisi Commodities, believes that crude oil prices have risen on the back of buoyant performance by equity markets and he sees the rising trend continuing.
    "Crude is entirely dependent on economic growth for demand and the Opec oil cartel is in no hurry to alter output," he said, predicting that the price of the commodity would hit $65 per barrel in the coming months.
    Private players like Reliance Industries and Essar Oil are in worse shape than the state-run retailers because unlike Indian Oil, Hindustan Petroleum or Bharat Petroleum, they don't get compensated with oil bonds for selling fuel at subsidised rates. Reliance and Essar shut their fuel retail operations for over a year, unable to bear the burden of selling petrol and diesel government-controlled rates.
    However, analysts such as Ali Muhammad Lakdawala of Anand Rathi Commodities are not convinced that crude oil prices will continue to rise, arguing that the market has been in an 'oversupply' zone for some time now.
    "Also, in the past few months there has been no uniformity in supply cuts among Opec members. While supplies in March were down, they rose again in April," he said.