A bunch of Indian stocks brace for hit from biggest jump in oil prices in 28 years
On Monday, Brent futures jumped nearly 19.5 % to trade at $71 a barrel in Asia.
And that will be bad news for a host of Indian industries that use crude derivatives as inputs, from aviation to paints, tyre, oil & gas (OMCs) and auto ancillary firms, say analysts.
On Monday, Brent futures jumped nearly 19.5 per cent to trade at $71 a barrel in Asia, clocking their biggest gains in percentage terms since 1991.
A sudden spike in oil prices is negative for oil marketeers IndianOil, BPCL and HPCL. But GAIL could see a positive impact, said Emkay Global, which added that a $65-70 a barrel range is ideal for ONGC and Oil India.
“Saudi oil facilities are now vulnerable to attacks by rebels, which would increase the geopolitical risk premium on oil prices. Saudi Arabia and its allies may also retaliate, leading to more tensions and a broader clash with Iran can be severe. The US may toughen its stance on Iran, contrary to the belief that the Iran-US standoff may have subsided after the recent resignation of US National Security Advisor John Bolton,” Emkay Global said.
Of the two facilities hit over the weekend, Abqaiq is important as it processes 7 million barrels of hard crude per day into light crude, as majority of refineries can only refine light crude and are dependent on it, said Sameer Kalra of Target Investing.
The two facilities account for over half of Saudi production and 5 per cent of global crude supplies. Saudi officials said the fire has been controlled and production will be resumed in 48 hours, but video and satellite footages depicted a grim picture.
News that Saudi Arabia is planning to shut down about half of its output after the strike also had an impact on oil prices, said Pritam Kumar Patnaik, Head of Reliance Commodities.
In the domestic stock market, weakness was visible on oil-linked stocks; aviation firms SpiceJet and InterGlobe Aviation fell up to 5 per cent; paints stocks Asian Paints, Berger Paints and Kansai Nerolac lost up to 3 per cent and oil marketeers BPCL and HPCL tanked 5 per cent each while IOC fell 3 per cent.
"OMC and aviation stocks may come under pressure in the short term if oil prices sustain at higher levels, but sectors such as paints and tyre, which use crude derivatives, may get impacted only if the situation escalates substantially. One can wait to see if it is a one-off spike in crude oil prices,” said Sunil Jain, Head of Research at Nirmal Bang Securities.
Since there is lack of oil buffer from Saudi’s significant spare production capacity, geopolitical tensions may add to global oil supply woes, said Kotak Securities. It noted that crude supplies from Iran and Venezuela have already been curtailed significantly amid sanctions from the US, while supplies from Libya and Nigeria have also shown vulnerability to disruptions in recent times.
"The spike in global crude prices, even though temporary, will be negative for downstream OMCs (BPCL, HPCL and IOCL) and Castrol. We do not rule out the possibility of moderation in marketing margins on auto fuels: a $10 a barrel rise in global crude prices may require OMCs to increase retail prices of diesel and petrol by Rs 5-6 litre in the following fortnight. A sharp jump in global crude prices may put pressure on refining margins. On the other hand, higher crude prices may be positive for upstream PSUs and GAIL," the brokerage said.
“The immediate range for Nymex crude will be $56 to $63 a barrel, but with the US accusing Iran of orchestrating the attack and Iran in turn threatening war, oil prices are expected to remain firm," Patnaik said.
For a country like India which meets 80 per cent of its oil demand through imports, any further rise in crude prices may have an impact on government finances.
Every $10 a barrel rise in crude oil prices expands India’s current account deficit (CAD) by 0.4 per cent of GDP. Every 10 per cent increase in crude oil prices can push up the inflation rate by 20 basis points.
Besides, a rise in crude oil prices can increase dollar demand, hurting the rupee-dollar exchange rate. A fall in the rupee lowers dollar returns for foreign investors, and makes their India investment unattractive.
"The government does not have too much room on the fiscal rise to really do something to jumpstart the economy. In case oil continues to remain at higher levels, I think that flexibility will go down further,” said Harsha Upadhyaya, CIO for Equity at Kotak AMC.