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MUMBAI : Demand concerns amid the disappointing US and Chinese economic data, forecast of higher US crude production, and the progress on Iran’s nuclear talks are weighing on global crude prices. Brent has slipped to below $100 a barrel from the highs of $121 a barrel in July.

Analysts said that Brent prices may remain volatile but will likely stay below $100 a barrel due to muted demand and expectations of more supplies.

On the positive side, softer crude prices are favourable for the Indian economy and, in turn, markets. However, it may not be good news for upstream oil producers such as ONGC and Oil India. The earnings of state-run oil producers depend on oil and gas realizations and production volumes, but after the windfall tax, the euphoria around crude realizations is already behind. On the production front, Oil and Natural Gas Corp. Ltd is seeing stable domestic production volumes, and its subsidiaries saw lower June quarter production, which was attributed to Russian oil sanctions.

However, with declining crude prices, analysts expect some reduction in windfall taxes by the government.

In the June quarter, ONGC reported an Ebitda of 25,930 crore (up 113% year-on-year and 39% sequentially) at a standalone level, primarily due to higher crude and gas prices and helped by oil realization at $108.5 a barrel, up 65% from the year ago and 14% sequentially. ONGC’s gas price on the basis of gross calorific value came in at $6.10, up 240% from the year-ago following domestic gas price revisions in line with international gas prices.

Nevertheless, despite the strong performance, analysts have downgraded earnings. “We trim FY23 and 24 EPS estimates by 28% and 11%, respectively, on lower crude oil realization at $74 and $75 a barrel from earlier estimates of $95 and $90 per barrel given $30 a barrel windfall tax," Elara Securities (India) Pvt Ltd analysts said.

To control inflation, the government imposed 23,250 per tonne ($40 a barrel) windfall tax on crude oil on 1 July, which was to be reviewed periodically. It is now reduced to 17,750 per tonne (about $30 a barrel).

Hence, ONGC’s profitability is likely to be capped. ONGC’s crude oil realization will be at $60-70 a barrel; thereby, it will not benefit from soaring commodity prices, said analysts at Prabhudas Lilladher.

Oil India Ltd’s net crude realizations were estimated at $65 a barrel for FY24 by JM Financials analysts. They said for every $5 a barrel change in net crude realization, it results in earnings per share (EPS) and valuation change by 14%. For ONGC, every $5 a barrel reduction in net crude realization results in 10% EPS and valuation change, said JM Financials.

With crude realizations capped, some benefits may accrue from higher gas prices for both ONGC and Oil India, and analysts said there is no talk of windfall taxes as of now.

ONGC’s crude production was up 3.2% from a year earlier to 4.742 mt. Crude production from joint ventures was at 0.5 mt, falling 10%. This was primarily due to lower production from ONGC Videsh Ltd (OVL). JM Financial said OVL’s production and earnings were hit due to the sanctions on Russia. For Oil India, however, production triggers exist due to ongoing expansions. Oil India has delivered good volumes in the first quarter and is confident of growing by 7% in FY23 and at least by 10% in FY24, Antique Stock Broking analysts said.

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