Burning oil is a burning problem for India

With the latest hike, the benchmark crude price has risen by almost 50% as compared to the previous 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. The brokerage said, “We maintain our current oil price forecast of $80 a barrel. Sometime in FY23, if ongoing geopolitical concerns persist in the coming months, upside risk Keeping in mind.”

If oil prices remain high on a consistent basis, upstream oil companies such as Oil and Natural Gas Corporation Ltd (ONGC) and Oil India Ltd will benefit. Already, both the companies have seen a meaningful jump in their price realizations in the December quarter (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. “After the elections, retail prices are expected to rise and from an inflationary perspective, it will be negative,” said an analyst requesting anonymity. “The November excise duty cut was helpful and it remains to be seen whether there are further cuts, which soften the blow to the consumer,” said the analyst.

To be sure, high oil prices are detrimental to most companies. The latest increase comes at a time when companies are already battling cost inflation at various levels. For example, while higher oil prices drive up packaging costs for fast-moving consumer goods (FMCG) companies, individual companies are also dealing with an increase 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. Also, some analysts say that if consumers spend more on fuel, it could impact demand for discretionary products.

In addition, for cement producers, petcoke prices tend to rise as a result of higher oil prices. In addition, freight costs generally increase, weighing on margins. Note that electricity and fuel expenses account for 25-30% of the region’s total operating cost.

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

For airlines, aviation turbine fuel constitutes a substantial portion of operating costs; Therefore, higher oil prices are not welcome. 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.

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—fiscal and CAD—simultaneously over the next 12 months.” “Import growth is fairly broad-based (non-oil, non-gold growing at 20% 2-year CAGR) and improving local demand, coupled with higher commodity/oil prices, put the current account under pressure,” the brokerage said. We estimate CAD of 2.5% of GDP in FY13 ($80/bbl assumption), a 10-year high.”