Plunge in crude oil prices is credit-negative for Indian upstream companies, according to rating agency ICRA.

Saudi Arabia slashed its oil prices over the weekend and pledged to increase production after Russia refused to join the OPEC in a production-cut as the spread of coronavirus continues to slow the global economy and oil demand.

The kingdom plans to raise production to 10 million barrels per day next month from 9.7 million barrels per day currently and could even reach 12 million barrels per day amid serious concerns of demand slowdown.

As a result, oil prices plunged more than 30 per cent in the biggest drop in prices since the Gulf War in 1991.

According to ICRA, the Saudi move would lead to a price war that could last several weeks or months until a compromise on resumption of production cuts ensues between OPEC and Russia.

According to K Ravichandran, Senior Vice-President and Group Head, Corporate Ratings, ICRA, “For the upstream sector, a decrease in crude oil prices is credit negative as their realisations and cash accruals will decline. If crude prices were to remain in the band of $30-$40/bbl, most of the Indian upstream companies could report losses, as the cost structure would remain rigid in the short run.”

Additionally, gas prices at various international gas hubs have declined, which would lead to lower domestic gas prices in the next fiscal. Accordingly, the realisations on gas sales would also decrease even as gas production remains either a breakeven or a loss-making proposition for most fields for the upstream producers, notwithstanding some decline in oilfield services/equipment cost. Low crude oil prices, if sustained, will also lead to a reduction in capex by private players.

Owing to the fall in crude oil prices, gross under-recoveries (GURs) on sensitive petroleum products are expected to decrease. A decline in the import bill and consequently current account deficit would be a positive from India’s exchange rate perspective. Besides, decline in crude oil prices would reduce inflation, says the report.

In the downstream sector, lower oil prices are expected to lead to inventory losses in the short term even as under-recoveries on sensitive products are likely to decline. A lower under-recovery burden would provide relief to the fiscal position of GoI, by way of lesser subsidy requirements and prospects for rise in duties to shore up revenues.

Because of demand slowdown, petrochemical margins, already under pressure due to spate of new capacities coming on line, could face further headwinds in the near term.

On the impact on consumers, Prashant Vasisht, Vice President and Co-Head, Corporate Ratings, said, “The decrease in gas prices should result in a decrease in CNG and PNG (domestic) prices by the CGD players, and the savings for the end consumers from the conversion economics perspective is expected to remain attractive. However, the PNG commercial and industrial segments that are fed from imported spot LNG would be significant beneficiaries of reduction in spot prices, owing to increasing competitiveness against alternate fuels.”

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