Will oil firms bleed more soon?

While there still seems to be a stalemate on a retail fuel price hike, oil marketing companies are gearing up for a hard hit this quarter in under recoveries.

S Vartharajan of Motilal Oswal Securities sees FY07 under recoveries for oil at Rs 70,000 crore (Rs 700 billion) plus. He says that Rs 4-5 increase would probably be required to keep under recoveries in manageable levels.

Vartharajan believes there are more issues than just supply-demand that are keeping oil prices up.

Excerpts from CNBC - TV18's exclusive interview with S Vartharajan:

Have you collated what sort of under recoveries these oil-marketing companies can have? What are they likely to do in the first quarter of FY07?

As under recoveries, we are expecting around Rs 10 for both the fuels at this point of time. Projecting for the full year, the number will be at a staggering Rs 70,000 crore plus. And with the government not in a mood to essentially take up any losses on its books at this point of time, the finance ministry refusing to cut duties, things are looking pretty grey and the first quarter is likely to be a real painful quarter for the oil marketing companies.

A Rs 4-5 increase would probably be required to atleast keep the under recoveries in levels, which are manageable. It is still not really very comfortable, but at least manageable.

What is your outlook for oil prices?

Frankly, it is anybody's call at this point of time. But the point here is as indicated, the demand is relatively looking better and supply is going full throttle. We have various issues, which have come up. For example Iran, obviously is a big issue and there are problems at Venezuela and Nigeria. Iraq supply continues to remain subdued.

To that extent, we have various factors, which come in at this point of time and it may not necessarily be demand supply issues, which are keeping the prices high. At this point of time, there does not seem much scope for any kind of a significant correction, which can give some comfort to us at this point in time.

You were making the point about the duty changes and what you expect?

Basically, the finance minister has indicated that he definitely is not in a position to take up significant cuts in duties. It is going to be difficult for them to balance their finances. Due to the fact that last year the numbers were comfortable in their revenues, if one is trying to take a big cut at this point of time, it is going to affect their position.

If the companies are very protective about their revenues, there is very little scope for one to take a significant cut or adjustment, which can actually have a significant impact on the final prices. This is because the kind of cuts that they can take, are still incremental and will be very small given the large under recoveries.

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