Oil price below expectations may be bad news for national oil companies (NOCs) in the GCC responsible for exploration and production of crude, but it is not so for the distribution companies that sell petrol and diesel through their retail outlets to customers that individually consume the most in the world at prices that are the lowest.
"A low oil price helps distribution companies in the region. What it means in the most practical terms is that as oil's price goes low, they source crude or the products at lower prices and sell it at prices dictated by the governments," a prominent trader with a Dubai Multi Commodities Centre (DMCC) member energy trading company said. At the Dubai Mercantile Exchange (DME), oil for delivery in August last traded at $75.36 a barrel. Nymex crude for delivery two months ahead sold for $78.25 a barrel yesterday having dropped 0.77 per cent from the previous day's close. Cracks, or difference between price of a product and crude, for different products in the international markets ranges in between -$4 a barrel to $15 a barrel, according to Dubai-based traders.
Some of the prominent oil distribution companies in the region include Adnoc, Enoc, Emarat and Woqod. These companies have to sell their products at prices fixed by the government - an obligation that erodes their margin. Especially difficult for them is the trade of petrol and diesel - fuels that are always in demand and which refineries sell at considerably higher prices. The region has steadily emerged as the largest per-capita consumer of oil in the world. According to the latest available figures from British Petroleum (BP), including Iran, the region annually consumes about 6.42 million barrels of oil daily. The UAE last consumed about 0.46 million barrels of oil in a year, whereas Saudi Arabia, the region's largest consumer and producer, consumed about 2.24 million barrels daily. Most countries in the region have recorded a double-digit growth in consumption in the past few years with Qatar the highest at around 16.5 per cent. Refining capacity in the region has not kept pace with the growth in demand, has grown at a rate of less than one per cent, and therefore, the region imports much of its crude product.
"The region imports a lot of petrol and diesel from Asian refiners, and therefore a drop in prices makes import easier," another trader said. There have been subdued reports in the market wherein the NOCs responsible for distribution delayed the payments of trading companies for a long period of time. "Such payments at times run into millions of dollars and a delay or default can destroy a trading company."
By Shashank Shekhar
© Emirates Business 24/7 2010
