WORRIED ABOUT FALLING OIL PRICES? GET REAL!

By Research Desk
about 10 years ago

 

By Ruma Dubey

Really, there is nothing which will make us humans happy, more so those in the capital market. Till a few months ago, we were ruing our fortune when oil prices were scaling above $100/barrel. We felt that we were about to lose it all and oil prices would cripple our limping economy.  Ok, so then we had falling oil prices.  Today, it slipped to $60/barrel, the lowest level since July’09. And instead of feeling good about it, most are worried and wondering when the prices will start climbing up again so that one could feel that all is well with the world economy. 

Why are we not able to enjoy the low crude oil prices? What is this underlying worry that comes along with a low oil price? Well, most are relating this low oil price to the state of the global economy with China slowing down and Europe continuing to be on the brink of a collapse. They say that the falling crude is a mere pointer to this ground reality. But then, in the same breath, when oil was above $100/barrel, shouldn’t we have celebrated because by the same logic it meant that world economies were booming. But even then, Europe was talking about deflation and China’s momentum was coming down. 

Those fearing the consistent fall in crude oil price say that exports will come down due to lower demand from oil exporting countries, especially Latin America as they will cut down consumption. Europe, especially Russia will also cut demand. But then, aren’t the exports currently supported by a rising dollar or a weaker rupee? When crude oil price falls, dollar rises; that is always the co-relation. 

Nomura has put out some fantastic statistics -  every $10/ barrel fall in oil price can boost India's GDP growth by 10 bps, bring down inflation by 20 bps, improve current account by 0.5% and fiscal balance by 0.1% of the GDP.

The advantages are far too many. Yes, the upstream and offshore oil companies like ONGC, Oil India, Cairn, RIL, Aban Offshore, Dolphin, Deep; all are staring hard at some tough times ahead. For them, exploration, expansion and production at current low rates become unviable. This affects their cash flow and consequently they cut down on production and exploration activities.  Most of them will find it very tough to find buyers for their assets and even if they do, valuations will be pretty low. The debt in forex with most of these companies will scream for help.

Yet, those who will be gain will easily outdo these losers. These companies have made merry for so long, now it’s the turn for others.  For us Indians, naturally this is good news as we import two third of our oil needs, comprising 37$ of import bill. One dollar fall in oil means a direct saving of Rs.40 billion. This means shrinkage in trade deficit and current account deficit too. The benefit which we get directly is that it reduces the subsidy burden on oil marketing companies, which in turn could mean lower fuel prices for us. With petrol and diesel prices now decontrolled, if crude continues to fall, we will have lower prices. And lower fuel prices would mean lower inflation, only to some extent. Remember, the falling dollar will increase WPI.

Companies which will benefit directly from falling crude prices are mainly upstream oil companies like ONGC, Oil India and less OMCs. These are the obvious gainers. Other big gainer 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 reduces, margins will improve. Analysts say that a 10% fall in crude oil price will boost margins by at least 200 bps. Another gainer will be tyre companies which also use crude derivatives in its raw material - in fact it has the double advantage of falling rubber prices too. Sintex is also listed as a big beneficiary as cost of its crude oil polymer, to make plastics will come down. Packaging costs will come down as it also uses petroleum derivative and that means better margins for Essel Propack and even FMCG companies. Airline stocks will also do well as falling crude will help better their balance sheets – a 10% fall in crude will lead to a 300 bps rise in EBITDA margins.  Diesel genset companies would also stand to gain but companies like L&T and Voltas which have considerable exposure to the oil producing Middle east and Gulf regions, may face some trouble because projects could get stalled and payments could get delayed.

Well, we all are so busy watching out for what's just ahead of us that we don't take time to enjoy where we are. So let’s enjoy this moment of low crude oil and yes, it’s a good thing!