CRUDE – OUR POCKETS AND ECONOMY TO GET CHEWED!

about 4 months ago
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Two years ago, we were looking at crude oil prices at $20/barrel and oil producing countries were crying barrels of tears.  

Today, they are a mighty happy lot what with crude nearing the three digit, $100/barrel mark. There is talk of $115, $114 and more such numbers doing the rounds. No one at this point of time is taking a call on the Sensex or the Nifty as all seem to have become busy plotting crude oil and the rupee’s trajectory.

Somehow, the constant brinkmanship on the Ukraine situation makes one wonder whether this is for real or is this entire geopolitical tension being created to boost up sagging oil economies? Nothing is too far fetched in today’s time.

Yes, crude oil is a worry today and could become fatal soon. All our talk about inflation could come to a naught if this one commodity continues to rise. A rising crude oil has the potential to reverse our low interest cycle at much quicker pace than what the RBI Governor would have wanted, jeopardizing growth  – that is how deadly the venom of this ‘crude’ snake is.

The big question really is how a rising crude oil price impacts India. The oil market pundits say that $100 - $110 would become really tough and beyond that, could be crushing. In oil, theoretically, we have deregulated fuel prices but we have to still see that work independently. When crude was falling in 2020, we had rising fuel prices and now crude is up, we have “stable” fuel prices. Election results will be out on 10th March; a price hike in petrol and diesel will be certain from the next day itself; it’s inevitable.

This directly impacts every single pocket – right from the fuel you fill up your car with to the fuel used in factories to make goods and fuel used to transport goods/people. Crude oil has a direct relationship in our day-to-day life and any sharp rise, will most certainly leave a telling impact. The simple fact is – if oil continues its march, the Govt might have to step in and once again announce subsidies.

Companies which will gain directly from rising crude prices will oil exploring companies like ONGC, Oil India, Reliance Inds, Petronet LNG.

But the losers list is long and winding. A big loser would be paint companies like Asian Paints, Kansai, Berger and Shalimar as 25% of their raw material cost is from a crude derivative and when that price increase, margins will dent. Analysts say that a 10% rise in crude oil price will push down margins by at least 200 bps.

HPCL, BPCL and IOC will also be feeling the heat as they have hit the pause button on price hikes for the past three months on account of elections. Every one dollar increase in crude price = a 50 to 60 paise price hike in per litre of petrol.

Another loser will be tyre companies which also uses crude derivatives in its raw material. Plastic makers could face the pressure as cost of its crude oil polymer, to make plastics will rise. Packaging costs will increase as it also uses petroleum derivative and that means pressure on margins for Essel Propack and even FMCG companies. Airline stocks will also feel the heat as rising crude will impact earnings– a 10% rise in crude will lead to a 300 bps fall in EBITDA margins.

Remember, the rupee is also falling with rising crude prices and that means, IT and pharma companies will gain a lot.

In today’s time, no one wants to hear anything negative even if it is the truth; the trend is to shoot the messenger and forget the message! Yet, better to be informed than getting hit on account of ignorance.

For now, we all can only wait and watch, see what happens, hoping that issues are resolved through diplomatic talks. And then get ready to pay more from 11th March…..

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