Oil prices will surge by 40% on a yearly basis in 2021

Rising commodity prices to benefit oil and gas sector: Experts

By Abhinav Singh

The recent surge in commodity inflation is expected to benefit the oil and gas sector in the country. Of late, the global commodity prices have been in full swing. A rise in prices comes amid an increase in Covid-19 cases and restricted economic activity. As per a recent report by Motilal Oswal, though sectors such as auto, consumer staples and consumer durables will be severely impacted by the rise in commodity inflation, metals and the oil and gas segment (involving upstream companies) will in turn benefit due to the surge in commodity prices.

As per CRISIL, after declining 34 per cent in 2020, it is expected that oil prices will surge by 40 per cent on a yearly basis to range between $58-63 (with an upward bias) per barrel in 2021. On the other hand, domestic gas prices are likely to increase by 10 per cent on-year to $2.2-2.4 per MMBtu (Metric Million British Thermal Unit).

“Companies such as ONGC and Oil India are likely to benefit from higher realisations, supported by increase in oil and gas prices as well as higher sales over a low base. For these players, revenue from the oil segment is expected to rise 35-40 per cent in fiscal 2022. Further, ONGC would also benefit from an increase in gas production from its KG-DWN-98/2 field (located off the shore of the Godavari Delta on the east coast of India). However, a sharp rise in revenue from the gas segment would be restricted due to domestic gas prices still being lower than pre-covid levels. Thus, during fiscal 2022, we expect revenue from the gas segment to increase merely 20-25 percent,” Hetal Gandhi, Director, CRISIL Research, told THE WEEK.

He says that all these trends would bring the overall revenue growth of oil and gas companies such as ONGC and OIL India to 30-35 per cent on-year in fiscal 2022 (against approximately 30 per cent decline in fiscal 2021). “In terms of profitability, we expect margins of these companies to expand 800-900 bps (against estimated decline of 900-1,000 bps in fiscal 2021), thus reaching pre-Covid levels of 44–46 per cent supported by higher top line growth,” added Gandhi.

Experts believe that commodity prices, including the oil and gas companies, are moving higher due to a strong demand and liquidity in the market. “Crude oil was negative in April 2020 and then started recovering and this would now benefit oil companies. India is expected to be one of the largest contributors to non-OECD (Organization of Economic Cooperation and Development) petroleum consumption growth globally. Crude oil import rose sharply to $ 101.4 billion in 2019-20 from $ 70.72 billion in 2016-17. In February 2021, Prime Minister Narendra Modi announced that the government of India plans to invest Rs 7.5 lakh crore ($ 102.49 billion) on oil and gas infrastructure in the next five years. This is likely to help local companies such as GAIL, Gujarat Gas and Petronet LNG. Oil companies will benefit due to a rise in crude oil prices,” observed Kshitij Purohit, Lead Currency and Commodities, CapitalVia Global Research Limited.

By Abhinav Singh

Source https://www.theweek.in/news/biz-tech/2021/05/28/rising-commodity-prices-to-benefit-oil-and-gas-sector-experts.html


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