Brent hits $100. What are the implications of high oil prices?

Unsurprisingly, following rising geopolitical tensions, Indian stock markets plunged. The BSE Sensex and Nifty 50 indices fell over 3% in early trade on Thursday.

High oil prices are bad news for India’s economy as it imports a large part of its fuel needs. With this, the benchmark crude prices have now risen by more than 50% in the past one year. A firming up of oil prices can be expected in the near future. “We expect crude oil prices to remain volatile and rise from current levels, if geopolitical concerns are not eased,” said a report by Kotak Institutional Equities on February 23. “We maintain our current oil price estimate of $80 per share,” the brokerage said. Barrels in FY2023 for the time being, while keeping ongoing geopolitical concerns in the coming months, taking upside risks into account.”

For India, higher prices have a negative impact on inflation and the country’s current account deficit (CAD). Nevertheless, in the high oil price environment, upstream oil companies such as Oil and Natural Gas Corporation Ltd (ONGC) and Oil India Ltd stand to benefit. Both the companies have already seen a significant jump in their price realizations during the December quarter results (Q3FY22). For instance, ONGC’s crude oil realization rose 75% year-on-year (YoY) and 9% sequentially to $75.7 per barrel. To that extent, higher crude oil prices offset the muted production outlook for these companies. Shares of ONGC have gained over 40% in the past one year, which shows that investors are factoring in ample optimism.

For state-owned oil marketing companies (OMCs), marketing margins come under pressure if retail pump prices are not raised substantially when crude oil prices rise. At present the retail prices are below the market price. An analyst, requesting anonymity, said, “After the elections, retail prices are expected to rise and from an inflationary point of view, it will be negative. The November excise duty cut was helpful and remains to be seen,” he added. What remains is to be further deducted. This will happen, which will reduce the blow to the consumer,” he said.

It should be noted that high oil prices are detrimental to most companies. Also, it comes at a time when companies are already battling cost inflation at various levels. For example, while higher oil prices increase packaging costs for fast-moving consumer goods (FMCG) companies, individual companies are also dealing with increases in other input costs. Simultaneously, the demand in the rural market has come down. Companies have hiked prices and investors will see to what extent this helps in gross margins.

In addition, some analysts believe that demand for consumer discretionary products could be hit if consumers spend more on fuel.

Also, for cement companies, higher oil prices lead to an increase in petcoke prices. In addition, freight costs typically increase, which is weighted on margin. Note that electricity and fuel expenses account for 25-30% of the region’s total operating cost.

For paint companies, however, there may be some respite as paint makers have made significant price hikes in the decorative coating business during this financial year. Paint companies use crude-based derivatives such as monomers. Analysts expect the March quarter results (Q4 of FY22) to reflect the full impact of the price hike, which will support margin recovery.

For airlines, aviation turbine fuel accounts for a large proportion of operating costs, so high oil prices are undesirable. In Q3, InterGlobe Aviation Ltd’s fuel CASK grew by approximately 90% yoy and 13% sequentially. CASK is the cost per available seat kilometer and is a unit of measurement. Brent crude prices averaged $79 a barrel in the third quarter, and so far in the fourth quarter they are at around $90 a barrel. It helps that domestic traffic data is showing a recovery in February after a disappointing January. How traffic recovery progresses is critical, and therefore yield strength, is a pricing measure for airlines. Shares of InterGlobe and SpiceJet Ltd were down nearly 5% in Thursday’s morning trade.

To be sure, higher oil prices also pose risks to a global recovery. The Moody’s Global Macro Outlook report published on February 23 said, “If prices remain at current levels or rise further, cost pressures will increase for many industries and domestic purchasing power will be reduced, leading to a global recovery.” The speed will drop.” “We expect a gradual decline in oil prices in the second half of 2022 and a further decline in 2023,” the report said.

Meanwhile, crude oil is not the only concern for India. In a note on February 21, Jefferies India said, “India is looking at the potential for ‘twin’ deficits over the next 12 months – fiscal and CAD – simultaneously.” The brokerage further said, “Import growth is quite broad (non-oil, non-gold is now rising at 20% 2-year cagor) and improving local demand, coupled with higher commodity/oil prices, will affect the current account. We estimate CAD of 2.5% of GDP in FY13 (US$80/bbl assumption), a 10-year high.”