Global crude oil prices have declined from $112 per barrel in June 2014 to $50 currently, primarily due to a significant increase in supply with a record US crude oil production, demand slowdown in Europe, Japan and China.
"The crude oil prices are expected to remain at low levels in the near-term, although oil prices could marginally recover over the next 1-2 years with slower production growth and demand recovery (aided by lower prices)," it said in a report.
Lower crude oil prices would materially impact profits of crude oil producers in India, it said adding that the operating profit of Cairn India could decrease by about 35 per cent in 2014-15.
According to K Ravichandran, senior vice president and co-head of corporate ratings at Icra, "the impact on (state-run) ONGC and OIL would be limited with around 15 per cent hit on operating profit in FY15 as their subsidy burden will likely go down with fall in under-recovery levels".
Icra expected ONGC/Oil India's subsidy discount to decline from $59 per barrel in FY14 to $40-45 in FY15.
If crude oil prices sustain in the range of $50-55 a barrel, the extent of discount for upstream companies would be a key driver of profits in FY16.
Further, cash generation of overseas ventures of ONGC Videsh Ltd, OIL and Reliance Industries (RIL) would decrease significantly.
The significant decline in crude oil prices, if sustained, will lead to reduction of capital spending of global E&P (exploration and production) companies due to lower realizations and deferment of development of complex fields due to poor economics, it said.
"This could lead to increase in idling assets of service providers, which could put pressure on the service providers to reduce rates leading to lower finding and development (F&D) costs for the upstream companies," Icra said.
Gross under-recoveries or revenue losses on fuel sales of downstream companies are expected to decline sharply from Rs 139,900 crore in FY14 to around Rs 78,800 crore in FY15 (estimated at Indian Basket crude oil price of $65 per barrel and rupee-US dollar exchange rate of 62.5 for the second half of FY15) and Rs 45,000 crore in FY16 (at crude price of $60 and rupee-dollar of 64).
Mr Ravichandran said, "On account of the lower crude prices, the working capital requirements of downstream oil companies would reduce leading to lower working capital debt levels. Additionally lower under-recoveries on the sale of sensitive products would also improve the profitability and liquidity of oil marketing companies."
Nevertheless, the sharp decline in crude oil prices during Q3 would lead to large inventory valuation losses for the downstream companies.
"Consequently, refining margins are expected to be negative or remain subdued," Icra said.