Long-term, expect crude at $65-70: MK Surana, HPCL
A stronger rupee is good for domestic fuel prices, says the CMD of HPCL.
Exactly six months ago crude was going higher, rupee was going lower. Thankfully, crude is going higher but rupee is also going higher now. Net-net it is not a nightmarish scenario.
That is correct because the domestic product prices are based on the international product prices and the exchange rate. If the rupee is weaker and the product prices are higher, then that is a double impact on the domestic market prices. A stronger rupee is good for domestic prices.
Do you think given the way dynamics are stacked up and China making a comeback, crude prices will remain firm and $70 to $75 could be the new normal?
Crude is very interestingly poised as of today. On the supply side, there is a good compliance with OPEC cut. There is a sanction looming on Iran-Venezuela. There is some internal disturbances in Libya. On the demand side, there are confusing signals in the sense that China demand growth is said to be good but we need to establish it.
As far as the US demand and economy is concerned, while the jobless claims have reduced, the Q4 GDP growth estimates have been lowered by 0.2% or so. IMF total estimate on the world economic growth is also a bit of a concern because it is being lowered. As far as OECD countries’ demand is concerned, it is reduced even though there was increase in demand from China and India.
On the demand side, we are yet to establish whether growth has come back or still remains a cause of concern. As far as supply is concerned, most of the factors had been already built in, except the current Libyan unrest and the actual outlook on Iran and Venezuela sanctions. But it also gives a little bit of levers to play around to ensure that crude prices do not go up.
While currently crude has crossed $71, I do not think it has conclusively crossed $70. Maybe in the immediate future, it may see little spikes here and there but the long-term view on crude still remains $65 to $70. One more is that because there are not a lot of buildup in the longs on the crude, the speculators may have the capacity to build up the momentum and in that may show some spikes.
We need to understand clearly that the consumer countries do not like very high crude prices. There is a threshold at which it starts impacting and a threshold at which the US shale activities pick up substantially. The logical and equilibrium stage in my opinion is $65-70.
How it is looking for diesel?
In FY19-20, growth for MS was around 8.1%, diesel around 2.7% and LPG around 7.1%. FY17-18 was a high growth period with MS (around 10.1%) and HSD about 6.6%. On a high base, these numbers looks quite reasonable as far as the growth part is concerned. Overall, it was around 4.6% growth in all products put together in ‘18-19 compared to ‘17-18 growth of 5.3%. It is a good growth and it should remain at this level in future.
HSD demand has been muted because the power situation seems to have improved. Power deficit has been reduced, which reduces the demand for diesel generator sets. Also in the passenger cars, the mix of diesel to petrol cars is reducing because the price differential between petrol to diesel has come down and there may be some impact on the diesel growth. But a growth of around 3% is reasonable growth as far as diesel is concerned and around 8% on MS with overall growth of around 4.3% to 4.6% is a reasonable growth for the products.
To those who say electric vehicles are coming and demand for fossil fuels is going to be taking a back seat, what would you say?
It is still some time before EVs can start making a substantial dent in the growth of fossil fuels. In some metros or NCR region, it may grow a bit faster in two-wheeler and three-wheeler segments but in the hinterland, it is some time away. The demand for fossil fuels should continue for at least 10 years. Unless there is a substantial policy intervention, which forces people to move on, it is going to be difficult in a country like India.
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