Oil and Gas Prices Aligning

maritimedrillingschool_oilandgas There is an interesting dynamic taking place in the oil and gas industry right now.  The share prices for multiple primary producers have gained.  This is atypical, as a gain in crude and gas prices rise, margins for refining typically fall and vice versa.  If refining margins rise crude and gas prices typically fall.  This means, as outlined by a Business Standard article , that the pure refiner profitability, or that of a refiner-retail marketer, are oft inversely congruent with producers profitability.

So what happens when both sides are gaining?  Typically the process implies that if primary prices rise it’s because of the company’s control of production makes money, that means you can expect refining margins to show improvement when primary prices decline.

India has even further issue with retail.  The prices are controlled by the Indian government and which is charged with compensating with direct payments to the retailers themselves.  This results in refiners, or as Business Standard puts it “refiners-cum-marketers,” end up losing money at the petrol pump on many of their products because of the subsidy being underpaid by the government.  This keeps refiners from the private sector looking elsewhere to other markets where they are getting more bang for their buck.  Because of this the public sector dominates the market and the upstream sector is somewhat responsible to shoulder the burden of losses which the government issued price controls enforce—minimizing the ability to maximize on profits regardless of gas and oil prices.

The logical and deemed likely outcome is that prices will be more closely aligned with international levels moving forward.  Because the pricing formula remains controversial, we will see India, a major gas importer, try and benefit from the domestic gas production market by linking the market with international prices.  This makes the pricing formula a prime candidate to be modified.