On Thursday, the price of Brent crude oil surpassed the $100-per-barrel threshold, as Russian President Vladimir Putin declared war on Ukraine.
Rising crude oil prices are seen as a big problem for India Inc., as any increase in raw material and energy prices could put more pressure on domestic companies’ margins in the future. On Thursday, the price of Brent crude oil surpassed the $100-per-barrel threshold, as Russian President Vladimir Putin declared war on Ukraine.
Higher crude oil costs, according to market analysts, are a big headwind for a number of industries, including aviation, paint, tyres, and oil marketing organisations. Brent crude oil has risen more than 30% year-to-date to $101.40 as of February 24. On December 31, 2021, the price of the commodity was $77.78 a barrel.
The cost of aviation turbine fuel (ATF) has increased 19% to Rs 90,519 per kl from Rs 76,062 per kl on January 1 as a result of rising crude oil prices. The increase in ATF prices may have an impact on airline firms’ balance sheets, as ATF accounts for more than 35% of the cost of operating an airline in India.
In the morning trade on February 24, shares of InterGlobe Aviation, the parent company of IndiGo Airlines, were trading nearly 7% lower at Rs 1,894, while the benchmark BSE Sensex was trading 2.91 percent lower at 55,566 at roughly 11:05 a.m. (IST). SpiceJet, on the other hand, was down 4.12% at Rs 58.20.
Paint firms, on the other hand, use crude oil derivatives as raw ingredients, such as monomers and titanium dioxide, which account for more than half of a company’s entire cost. Similarly, crude derivatives are utilised in the production of tyres, accounting for roughly 30% of the entire raw material cost.
In the morning trade on Thursday, Asian Paints was trading over 2% lower at Rs 3,167. Both Berger Paints and Kansai Nerolac were down more than 3%. MRF, JK Tyre, and Ceat, all tyre companies, were down more than 2% each.
Santosh Meena, head of research at Swastika Investment, said of rising crude oil prices and their impact on India Inc., “High inflation is a critical issue amid strong growth where we are seeing sharp margin pressure in India Inc. earnings.” If crude oil prices continue to rise, sentiment may suffer in the short run.”
“Rising crude oil prices may have an impact on industries such as aviation, paint, tyres, and oil marketing, while oil exploration businesses may benefit.” Higher oil prices will put downward pressure on the currency, which will benefit export-oriented industries such as IT and pharmaceuticals,” Meena noted.
If petroleum prices remain high, according to VK Vijayakumar, chief investment strategist at Geojit Financial Services, it will be a huge macro headwind for the Indian economy.
“Our trade imbalance will grow, the rupee will weaken, and inflation will soar.” Even if the government absorbs some of the crude price increase through excise reduction, consumers will have to pay a portion of the increase, resulting in cost-push inflation. The RBI will be obliged to abandon its accommodative monetary policy, which it has maintained since the start of the pandemic. However, if the crisis passes quickly, petroleum prices will fall, and the situation will stabilise.”
“Brent will continue to surge as geopolitical tensions escalate and war, which is now imminent,” Megh Mody, research analyst-commodity and currency, Prabhudas Lilladher, said. If Brent continues to trade above $105-110, India, like the rest of the world, will suffer from sky-high inflation. Going forward, the Indian rupee will be lower. Crude imports, which account for 20% of India’s import bill, must be reduced to a specific percentage, and crude replacements, such as ethanol, must be adopted as soon as feasible to free the country from the grip of inflation.”
“As the battle escalates, the likelihood of money printing will increase, favouring global stocks once again, as shown in the case of a pandemic,” Mody said, adding that crude oil and the Nifty have historically had a positive link.