Oil companies in the limelight

Oil companies are in the limelight today. Upstream oil company, ONGC fell almost 3% to Rs.176.80. On the other hand, downstream oil marketing companies (OMCs) HPCL rose over 2.5% to Rs.422, BPCL rose 3% to Rs.507 and Indian Oil rose 1.3% to Rs.393.

The reason for this flurry of activity in oil companies is crude – the commodity which was on a sharp rise last week, this week, for four straight days has been on the decline on the international markets. Brent crude declined 1.2% to $61.44/barrel while WTI fell 1.08% to $55.10/barrel. Since last week, crude prices have climbed down 5%.

The reason for the drop? Yesterday, the International Energy Agency (IEA) stated that there might not be any tightening in the fuel markets as it expects demand to remain low. The IEA cut its oil demand growth forecast by 100,000 barrels per day (bpd) for this year and next, to an estimated 1.5 million bpd in 2017 and 1.3 million bpd in 2018.

Just for knowledge – brent crude is a combination of crude oil from 15 different oil fields in the North Sea, lighter than West Texas Intermediate (WTI). ‘light’ refers to density of oil – lower the density, better is the blended fuel quality. It is best for making petrol. It is primarily refined in Northwest Europe, and is the major benchmark for other crude oils in Europe or Africa.

WTI is the other major global benchmark oil for price setting and is actually of better quality than Brent. It is extracted from wells in the United States and is considered to be a very sweet and very light crude oil. A major drawback is that it is landlocked meaning that transportation is more expensive and more involved than it is for a waterborne crude oil such as Brent. 

Brent blend is generally priced at about a $4 per barrel premium to the OPEC Basket price or about a $1-2 per barrel discount to WTI.