Oil dips , price hike inevitable in may 2011
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Oil dips , price hike inevitable in may 2011
NEW DELHI: Global oil prices declined to their lowest level in seven weeks on Monday as news of Osama bin Laden's killing improved perception of geopolitical stability, eased concerns over West Asian supply risks and lifted the greenback against most other currencies. But analysts said this was a "temporary phenomenon" and an increase in fuel prices in India was inevitable.
Agency reports said Brent crude for June settlement slid $4.22 to $121.67 a barrel on London's ICE exchange. The WTI variety was down $2.25 at $111.38 a barrel on Nymex. However, it later recovered slightly to $114.37.
"Osama's killing may be fanning a sense of geopolitical stability, particularly in West Asia. But you are still looking at a volatile region. Unless the situation in Libya, Bahrain, Tunisia, Yemen and Egypt settles, crude could be provoked easily," P Sugavanam, former director (finance) of India's biggest refiner-marketer IndianOil Corporation, said.
The dollar's strength, which has a bearing on commodity prices, too, was not expected to last long. "The dollar has been weakening. It may have gained on Osama's news. But the US economic indicators are not enough to keep it buoyed in the long term," Sugavanam said.
Analysts explained that most countries have to buy the greenback-except in euro-denominated transactions-since it is the global currency for trade. Any gain in its value, therefore, sets off a decline in commodity prices. "This is the way market forces balance changes in purchasing power of consuming countries and intrinsic value of a commodity," an analyst with an investment bank said, requesting that neither he nor his institution be identified.
Since India imports 75% of its crude requirements, it is vulnerable on both counts. The rupee dropped 15 paise to 44.37 against the greenback in early trade on Monday. The mix of crude India buys has topped $120 a barrel in 2010-11, higher than the average of $83.57 in 2008-09 when oil peaked at $147.
A recent IndianOil presentation to oil minister S Jaipal Reddy said every Re 1 change in exchange rate had an annualized impact of Rs 8,600 crore on the oil marketing firms' losses, worked out at $110/barrel of crude. Similarly, every $1 change in oil prices had an impact of Rs 3,200 crore.
The oilmarketers are estimated to have run up a loss of Rs 17,400 crore in 20010-11 on selling fuels at government-capped prices. They now lose Rs 16.76 on a litre of diesel, Rs 28.33 on kerosene and Rs 315.86 per cooking gas cylinder. They also lose Rs 4.50 on petrol, which is officially decontrolled but prices are changed only on the oil ministry's cue. That signal has been held back due to state polls.
It then looks like the government will have no choice but to raise motor fuel prices because crude is unlikely to drop down below $100 a barrel-if at all. One reason is speculators, who, according to commodities market bull Goldman Sachs, have added $27/barrel to the price. "Speculators may have shed their positions but they will be back once the euphoria over Osama's killing settles," the analyst said.
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http://timesofindia.indiatimes.com/business/india-business/Oil-dips-but-price-hike-inevitable/articleshow/8147468.cms
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