Continuing their upward momentum over the past fortnight, the stocks of public sector oil marketing companies – Indian Oil, HPCL and BPCL – rallied 3.4 to 5.5 per cent today. The good run in these stocks is thanks to the steep fall in global crude oil prices. After rising sharply in mid-June on fears of supply disruption due to the violence in Iraq, crude oil has been on a slippery slope. From nearly $115 a barrel in mid-June, the price of Brent has been continuously falling and today touched nearly $90 a barrel, a 27-month low. The weakness in global crude oil prices is thanks to rising global supplies from countries such as the US and Libya, and subdued demand due to economic weakness in China and Europe. Lower crude oil price along with a fairly stable rupee has resulted in the Indian crude oil basket costing much less now (about Rs 5,800 a barrel) than in June (more than Rs 6,500 a barrel).

Low crude oil also means lesser under-recoveries to be incurred by the oil marketing companies due to selling fuels – diesel, LPG and kerosene - below cost. Combined with the monthly 50 paise hikes, lower crude oil prices have wiped out the under-recoveries on diesel – the biggest contributor to the notional losses in the past. In fact, the oil companies are now having an over-recovery on diesel, earning Rs 1.9 a litre more than intended. With under-recoveries on diesel not a worry (at least for now), and that on LPG and kerosene also set to fall with lower crude oil price, the total under-recoveries of the oil marketing companies are set to fall to under Rs 90,000 crore in 2014-15 from nearly Rs 140,000 crore last fiscal year.

For the past many years, the subsidy overhang was a drag on the stocks of the oil marketers. Yes, the oil marketers mostly get fully compensated for the under-recoveries but money from the government comes with long delays – this means heavy borrowing and stretched balance-sheets for the oil marketing companies. Lower subsidies spell good news not just for the oil marketers which incur under-recoveries initially the first place. It also bodes well for the upstream companies (ONGC and Oil India) and GAIL (India) which bear 40 – 50 per cent of the under-recovery burden by providing product discounts to the marketers, and the government which bears a chunk of the remaining burden.

On the other hand, the fall in crude oil price is bad news for pure play explorers such as Cairn India whose realisations are linked to prevailing Brent prices. The Cairn stock has slipped nearly 14 per cent over the past month.

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