BackWhat does the Iran nuclear deal mean for consumers?
The deal could bring relief to consumers and companies that use crude oil-linked products every day
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Mumbai: Iran’s landmark nuclear agreement with the US and five other world powers could keep global oil prices low for a longer period, bringing extended relief to consumers as well companies that use oil and its derivatives as raw material.
The US oil and natural gas statistical body—the US Energy Information Administration (EIA)—estimated in May that lifting oil sanctions on Iran could bring down oil prices by $5–15 per barrel.
This would essentially mean that products made after refining crude oil—petrol, diesel, kerosene, liquefied petroleum gas and lubricants—could become cheaper.
“This deal is good news for India. Even a modest increase in oil production in Iran would put further pressure on prices in an already oversupplied market and keep prices below $70 per barrel in the short to medium term, which means India’s import bill will continue to be almost $50 billion less than what it was two years ago," said Debasish Mishra, senior director, consulting, Deloitte Touche Tohmatsu India Pvt. Ltd.
He said at the macro level, the lifting of sanctions will also lead to a geopolitically more stable Persian Gulf, which is in India’s long-term interest.
The biggest beneficiary, however, would be commuters who run their vehicles on petrol and diesel.
Indian consumers have already benefited from the fall in global crude prices, which started in July 2014. As a result, diesel prices have fallen 13% to ₹ 50.22 per litre as on 1 July 2015, from ₹ 57.84 per litre a year ago, according to the Petroleum Planning and Analysis Cell (PPAC), a statistical body under the oil ministry.
Over the same period, the cost of petrol has fallen 9.5% to ₹ 66.62 per litre from ₹ 73.60 per litre. The price of both the commodities in New Delhi has been taken as a reference for the data as prices differ from state to state due to local levies.
As prices fell, consumption rose.
“The consumption of petroleum products is a reflection of the economic health of the country. India’s energy consumption grew at 7.1% in 2014, the highest rate of increase among major economies," said a note by PPAC in May 2015, adding that this was a factor that led to the economic growth of 7.3% in 2014-15.
The PPAC note shows that the consumption of petrol and diesel rose 11.3% and 1.5%, respectively, in the last financial year. In turn, oil marketing companies (OMCs) that sell these products have seen their profits rise.
Analysts say that apart from consumers, even shareholders of these OMCs— Indian Oil Corp. Ltd (IOCL), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL)—will see a continued surge in share prices.
In the past year, BPCL shares have gained 62.38%, HPCL 119.36% and IOCL 33.63%.
“We could see pressure on the crude oil price in the next six months as it (Iran) can supply an extra 500,000 barrels per day within a month and around one million barrels per day within the next six months. Iran currently exports about 1.3 million barrels per day (bpd) of oil, down from its 2.2 million bpd level 10 years ago, before sanctions were imposed. It is a positive for OMCs as under-recovery will come down further on the back of expected correction in crude oil price," said a 14 July note by securities house Emkay Research.
Oil explorers and producers such as Oil and Natural Gas Corp. Ltd (ONGC), Oil India Ltd and Cairn India Ltd will be bracing up for tough times ahead as crude prices look set to stay low.
An analyst with a domestic securities house said the biggest impact will be felt by Cairn India, which reported a net profit drop of nearly 82% in the last financial year due to an almost 48% decline in crude prices.
Mishra of Deloitte said there is a silver lining for ONGC. Its subsidiary ONGC Videsh Ltd, the overseas arm, could see the unlocking of pending investments in Iran as the Islamic republic seeks to revive its oil and gas projects following the easing of sanctions.
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