Social factors

Expected auto fuel price cut has to be accompanied by pricing freedom Domestic prices of auto fuels are soon likely to be cut. There is also expectation that price cuts will be accompanied by freedom to R&M companies to price auto fuels in future. It is believed that pricing freedom being given is crucial for investor sentiment in R&M companies remaining favorable. Pricing freedom is also key to ensure subsidy situation does not worsen when oil prices rise again like it did since FY06.

Road map & steps to eliminate LPG & kerosene subsidy will be a positive The government approving a road map for elimination or better targeting of LPG and kerosene subsidy and implementing it would be a big positive. Any such development is likely to improve investor sentiment in R&M companies and could even boost FY10E earnings.

Technology

With the addition of complex refining capacity globally, there are two conclusions: 1) more sophisticated refining means lower crude oil demand, 2) conversion capacity will chew through the worlds RFO supply and tighten light-heavy spreads.

Demographic
Decision of Mumbai High Court on pricing and gas supply from KG Basin News on oil & gas finds Commencement of gas production for KG Basin; details of buyers.

Foreign
OPEC production cuts and discipline key determinants of crude prices As in the past, during high spare capacity, OPEC production cuts remain key determinants of crude prices. Already there have been two cuts, 0.5 mbpd in September and 1.5 mbpd in November, 2008. Further controlled sequential cuts of 1.6 mbpd to balance the crude markets worldwide. Our confidence in further cuts comes from crude price breaching Saudi Arabias CY08

nil-fiscal-deficit break-even level of USD 49/bbl. A key factor to watch out for, going forward, will be the discipline and adherence to announced cuts within OPEC nations. Currency effect: The USD factor The tight balance between supply and demand during 200208 was not the only factor that drove higher oil prices; oil prices were also caught up in an increasingly unsustainable commodity boom. The final explosion in oil and other commodity prices began in late summer 2007, as a weakening dollar set off a flight to commodities, besides creating an increasing emphasis on oil and other commodities as an asset class and storehouse of value. However, they are no more contributing factors now, as de-leveraging across the globe has reduced the availability of money for chasing commodities. Despite the recent sharp fall in USD once again, oil prices have not inched up. Most Asian currencies have weakened significantly vis--vis the dollar over the past year (Exhibit). This partly negates our cut in GRM estimates, since refiners earnings are denominated largely in US$

Government
Easing fiscal terms to help supply growth During rising oil prices, the phenomenon of resource-holding by governments for securing a larger share of economic rents through tax hikes and changes to terms on which resources could be accessed. In many major oil-producing nations (countries holding more than 200bn bbls of reserves), the state-takes now averages 85%, having risen over recent years by more than 15%. Some host governments have set tougher terms only for new activities, while others have also increased their take from existing contracts. However, with lower oil prices and rising risk to investments, It is expected that government policies would also change, consolidating the weaker demand trajectory. Critical imbalances among price, costs and taxes may call for emergency responses. There has already been one such response: in November, Russia announced a 32% cut in oil export duties. It is believed that easing fiscal terms may also bring down the cost of investments, besides making projects more attractive in IRR terms. Going forward, this would be helpful in easing supply constraints.