Modi to Abe Favor Oil Bears as Plunge Aids Asian Economies

Updated on

Prime Minister Narendra Modi has oil to thank for helping an economic revival in India. Whether his luck holds depends on a meeting in Vienna tomorrow.

Awaiting the outcome of the summit of the Organization of Petroleum Exporting Countries on Nov. 27 are other Asian leaders who depend largely on imported oil. While Chinese President Xi Jinping is looking at shoring up an economy on track to record its weakest annual growth since 1990, Japan’s Prime Minister Shinzo Abe is banking on OPEC’s 12 members sustaining production levels to stem his nation’s slide into recession.

Oil’s slump this year is good news for these nations, which are exposed to the risk of global price changes that affect their balance of trade. In India, which imports 80 percent of its oil, the key stock index has risen the most among Asian indexes this year as crude slumped.

“The lower the prices, the better for us,” K.V. Rao, finance director at India’s third-biggest state refiner Hindustan Petroleum Corp., said by phone. “We’ll watch how it unfolds on the 27th. We’re currently in a sweet spot.”

While China has signaled tolerance for weaker growth as the government tackles corruption, pollution and debt, the economy needs stable oil prices for a recovery. Despite holding the world’s largest shale gas reserves, the nation has remained dependent on imports because progress on extracting fuel trapped in rocks has belied expectations.

Bear Market

Crude oil prices plunged into a bear market this year as U.S. production rose to the highest in more than three decades and amid speculation that Saudi Arabia, the biggest OPEC producer, wouldn’t cut output. Analysts are divided on whether OPEC will cut production when it meets, or leave it unchanged.

OPEC, which supplies about 40 percent of the world’s oil, is considering exemptions for three nations from any potential cuts, two people with knowledge of the proposal said. Iraq, Iran and Libya wouldn’t have to reduce supplies should OPEC agree to cut output, according to the people, who asked not to be identified in line with their national policies.

Ahead of the OPEC meeting, talks in Vienna among officials from Venezuela, Saudi Arabia, Russia and Mexico yesterday failed to result in a joint commitment to reduce production, according to Rafael Ramirez, Venezuela’s foreign minister and OPEC representative. All parties agreed they were worried about the price of oil, he said.

What OPEC decides will have consequences around the world. Should it agree to cut output to boost prices, producers including Exxon Mobil Corp. and Royal Dutch Shell Plc will benefit, as will the hundreds of companies that crack open shale rocks for oil in the U.S.

Australian LNG

The decision will also favor companies from Chevron Corp. to BG Group Plc that are building liquefied natural gas projects in Australia worth a combined $180 billion. Australia, with seven such projects, is on course to surpass Qatar as the world’s biggest exporter of the fuel later this decade.

“The hope from an LNG project perspective is that OPEC will play the role it has been willing to play in the past, which is to keep the market broadly in balance,” Nik Burns, a Melbourne-based analyst at UBS AG, said in a Nov. 24 phone interview. “Everybody will be focusing on it.”

ConocoPhillips, Inpex Corp. and Shell are among other energy companies investing in Australian LNG. Most of their LNG will be sold to Asian customers at oil-linked prices. A lower oil price, therefore, can have a “big revenue impact” on owners of the export projects, Burns said.

Oil Link

Not only will unchanged OPEC production help India and Japan, which buys all of its oil from overseas, it will also lower prices of natural gas imports for these two countries. South Korea, the world’s No. 2 LNG importer, will also benefit.

The price of liquefied natural gas sold by most producers is linked to crude oil. Lower crude means cheaper LNG.

Spot LNG cargoes for delivery in four to eight weeks in northeast Asia dropped to $10.50 per million British thermal units, the lowest in 3 1/2 years, in the week ended Nov. 17, according to data from New York-based Energy Intelligence Group’s World Gas Intelligence publication.

“Lower prices will benefit the users of gas and make it more affordable and competitive against alternate fuels like naphtha,” said R.K. Garg, finance director at Petronet LNG Ltd., India’s biggest gas importer. “We’re all hoping OPEC output levels remain and oil prices stay low, because that would be great news for the country’s economy and markets.”

Free Diesel

Modi got the room to free diesel prices from state control for the first time in a decade, cutting subsidies on the fuel and narrowing one of Asia’s largest fiscal deficits. Lower oil was a reason HSBC Holdings Plc last month cut its forecast for India’s current account deficit to 1.5 percent of gross domestic product from 2.1 percent.

Falling Brent has more than doubled the share prices of Bharat Petroleum Corp. and Hindustan Petroleum this year. Indian Oil Corp. has gained 60 percent since January, heading for its biggest annual increase since 2007.

JPMorgan Chase & Co. this month upgraded Hindustan Petroleum’s stock to overweight from underweight, Bharat Petroleum to overweight from neutral and Indian Oil to neutral from underweight. Hindustan Petroleum’s target price was also raised by 103 percent to 895 rupees a share.

All three refiners are state-owned and were selling diesel at rates below cost. The objective was to help the government curb inflation before being allowed to set individual prices starting October.

Hindustan Petroleum will be comfortable even if oil reaches as high as $90 a barrel, Rao said. He doesn’t expect OPEC to reduce production levels in its meeting this week.

“I don’t think any great things are going to happen at that meeting that will majorly change the oil markets,” he said. “But we’ll watch it with great interest.”