With the Organization of Petroleum Exporting Countries (OPEC) deciding at its crucial meeting yesterday to maintain status quo and to not cut oil output to support prices, crude oil continued its precipitous fall.

From $76 a barrel on Wednesday, Brent crude price fell to $72 yesterday and further to $70 a barrel today. The current price is a four-and-half year low and almost 40 per cent lower than levels in mid-June when Brent traded at about $115 a barrel. Subdued demand due to weak global economic conditions especially in China and increased supplies primarily U.S. shale oil have resulted in a supply glut. The U.S. and China are the largest consumers of crude oil in the world.

In response to the sharp fall in crude oil price since Wednesday, the stocks of the oil marketing companies – Indian Oil, HPCL and BPCL rallied between 4 – 8 per cent today. Declining crude oil price means lower under-recoveries on domestic LPG and PDS kerosene to be incurred by these companies due to selling these fuels below cost.

The transport fuels – diesel and petrol – have been decontrolled and there is currently no under-recovery on these fuels with market-linked pricing.

Interestingly, there was hardly any movement in the stocks of the oil explorers ONGC and Oil India which bear 40 – 50 per cent of the under-recovery burden of the oil marketing companies by providing product discounts. Lower under-recovery burden should improve the net realisations of these explorers (upstream companies). But the recent subdued movement in the upstream stocks, after a strong run over the past few months, perhaps reflects concerns that sharply lower crude oil prices could offset the benefit of lower subsidy burden for these companies - especially because the government has not yet come out with a clear subsidy sharing formula, a reform measure that is keenly awaited.

Meanwhile, pure play explorer Cairn India which gets almost all of its revenue from crude oil sales and whose fortunes yo-yo with the fuel’s prices continued to slip on the bourses and fell about 4 per cent in today’s trade. The Cairn stock is down more than 30 per cent since early-June.

On the other hand, airline stocks Jet Airways and SpiceJet rallied 10 – 19 per cent today. Lower crude oil price translates into lower cost of aviation turbine fuel (ATF). For the beleaguered airline sector in India, fuel cost is the major expense accounting for nearly half the operating costs. Any moderation on this front is welcome relief.

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