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Weak Rupee and High Crude Prices to Deepen Crisis at OMCS

  • The rupee, which depreciated 19% in 2011, is expected to remain weak due to an unfavorable current account deficit and high risk aversion amongst the foreign investors.Any news is good news for crude oil. Talk political tensions and the prices will spike on supply disruptions fears. Sprinkle the market with some positive economic data, the prices will rally. A combination of these two (fear and optimism) have helped crude prices so far. Even as the global economy teeters between the economic stagnation and recession fears, Brent crude has registered a smart 13% gain in 2011.Enter 2012 and the scenario is unlikely to witness any significant alterations (prices are already up 6% so far this year). Though base metals are expected to remain subdued, analysts, by and large, expect oil to fare better than the broader commodity markets.

  • J.P. Morgan said in Global Markets Outlook and Strategy notes, “In contrast, oil prices should remain in their current range as we believe Opec would act to support prices should they fall materially. In addition, any escalation in tensions between Iran and the West would likely see much higher oil prices while metals should suffer significantly.”Estimates for the Brent crude vary from $102 to $116 a barrel. While Bank of America Merrill Lynch expects crude to average $108 a barrel in 2012, analysts at Macquarie research forecast the rates to hover at $116 in fiscal 2012-13.

  • High oil prices will only worsen the financial situation at oil marketing companies (OMCs). Apart from high prices, OMCs also have to contend with depreciating rupee. The rupee, which depreciated 19% in 2011, is expected to remain weak due to an unfavorable current account deficit and high risk aversion amongst the foreign investors. A combination of firm crude prices and weak rupee will substantially increase under-recoveries at the OMCs.According to analysts at Macquarie research, high oil prices and weak Indian rupee could increase the under recoveries at the oil marketing companies by as much as 2-3 times to $34-40 billion over the next two financial years.

  • Jal Irani and Abhishek Agarwal of Macquarie research said in a note “The double whammy of higher crude prices and a depreciating rupee could increase under-recoveries of subsidized fuels, which are already very high.” The note adds “As higher under-recoveries and constrained reimbursements imply a larger burden on OMC balance sheets for the usual 1-2 quarter delay for the gov’t provided cash, we see OMC interest costs remaining high.”According to Macquarie estimates, under-recoveries of the oil marketing companies are estimated to jump 62% in current year and 29% in next financial to Rs1.7 lakh crore next fiscal.Overall, the weak rupee and firm crude prices are expected to weigh on the OMCs performance in 2012 also. The stocks of the IOC, BPCL and HPCL, which lost over 23% each in 2010, could lose further ground.

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