Crude oil prices: Continue to increase in November:: Kotak Securities

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Energy
India
Crude oil prices: Continue to increase in November


Global refining margins: Steady mom
India marketing margins: Increase in global prices results in higher marketing
losses


Crude oil prices: Continue to increase in November
Crude oil prices sustained momentum (+3.3% mom) in November led by—(1) continued high
speculative activity in the US driven by easing liquidity from QE2 and (2) upward revision in oil
demand estimates for CY2010-11E by IEA and OPEC. However, crude prices reversed their
uptrend in the latter half of the month led by growing concerns on the sovereign debt crisis in
Europe. We expect crude oil prices to remain in the US$75-85/bbl range in the near term as (1)
large OPEC spare capacity of ~6 mn b/d despite slippages in new projects and (2) high level of
inventories will likely offset the increase in global crude oil demand. Spot natural gas price (Henry
Hub) increased to US$3.7/mn BTU in the recent month versus US$3.4/mn BTU in October 2010.


Global refining margins: Steady mom
We compute Singapore complex gross refining margins at US$0.3/bbl in November 2010 versus
US$0.4/bbl in October 2010. Refining margins remained stable despite expansion in product
cracks—(1) gasoline cracks to US$9.4/bbl (versus US$9.3/bbl in October 2010), (2) diesel cracks to
US$12.6/bbl (versus US$12.4/bbl in October 2010), (3) naphtha cracks to US$3.1/bbl (versus
US$2.2/bbl in October 2010) and (4) kerosene cracks to US$14/bbl (versus US$13.7/bbl in October
2010). Fuel oil crack spread contracted to –US$6.3/bbl (versus –US$6/bbl in October 2010). We
expect refining margins to remain subdued in the near term given supply-demand imbalance. We
estimate India refining margins to improve moderately to US$4.2/bbl in December 2010 versus
US$3.8/bbl in November 2010.

India marketing margins: Increase in global prices results in higher marketing losses
We estimate moderately higher marketing losses on cooking fuels in December 2010 due to
increase in global product prices. Marketing margins for gasoline declined despite the recent hike
in domestic retail prices. We compute marketing margins assuming unchanged domestic prices for
diesel at –Rs2.6/liter (versus –Rs1.6/liter in November 2010 and +Rs0.9/liter in FY2010) and for
gasoline at –Rs2.2/liter (versus –Rs1.3/liter in November 2010 and –Rs2.9/liter in FY2010). We
compute subsidy losses on LPG and kerosene to be Rs352/cylinder and Rs18.6/liter for December
2010 versus Rs287/cylinder and Rs17.5/liter in November 2010.
We have included some key exhibits here. For more details, please refer our India Energy Monthly,
December 2010.