Wednesday, October 16, 2019
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Strike on Saudi facilities may add a geopolitical risk premium to oil prices: ICRA

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New Delhi | September 16, 2019 6:41:26 PM IST
A coordinated drone strike on Saudi Arabia's key oil facilities over the weekend is expected to add a geopolitical risk premium to oil prices and is credit negative for Indian consumers, investment information company ICRA said on Monday.

"While the oil markets await further updates on resumption of supplies from Saudi Arabia, markets will nevertheless be nervous as any retaliatory measures by Saudi Arabia and its allies will keep the market on tenterhooks," said K Ravichandran, Senior Vice-President and Group Head of Corporate Ratings at ICRA.

"As a result, oil prices should factor in sizeable geopolitical risk premium which will be negative for Indian consumers. Nevertheless, this impact is likely to be short-lived as the market will rebalance swiftly once the tensions abate," he said.

Significant increase in crude oil prices has the potential to slow down global demand growth, already reeling under the impact of the US-China trade war, which could also adversely impact global crack spreads. Thus, gross refining margins of domestic refineries over the medium term could be impacted, although the International Maritime Organisation norms implementation for bunker fuels could offer some respite from Jan 2020.

Prashant Vasisht, Vice President and Co-Head of Corporate Ratings at ICRA, said higher petroleum products prices are expected to modestly impact the demand growth of petroleum products over near to medium term. Industrial consumers may face pressure on the profitability with rise in input prices of crude derivatives besides possible increase in power and fuel cost.

"The retails consumers will face increase in inflation driven by higher transportation and logistics cost. Nonetheless, city gas distribution companies will be well placed on the demand front as the price differential between CNG/PNG versus alternate liquid fuels widens giving them better pricing power," he said.

As per ICRA's estimates, till an Indian basket crude price of 70 to 75 dollars per barrel is maintained, the public sector unit upstream companies may not have to bear material under-recoveries. Thus, their net realisation and cash accruals will improve unless the extant under-recovery sharing formula is changed. (ANI)

 
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