 "5 sectors that will be impacted by rising oil prices")
The international benchmark Brent crude oil prices may have fallen from its 16-month high of $55 per barrel after US Federal Reserve (US Fed) hiked interest rates by 25 basis points (bps) late on Wednesday, a tighter fuel market looms in 2017. Brent prices have more than doubled from its low of $27.88 a barrel recorded in January.
The recent rise comes on the back of Organisation of Petroleum Exporting Countries (OPEC) decision to cut oil production for the first time in eight years.
Going ahead, JM Financial expects Brent to cross $60 per barrel in 2017. "Cuts in oil production by both OPEC and non-OPEC nations have triggered risks that crude price may cross $60/bbl,” it said in a research report.
In the immediate term, however, rating agency CRISIL expects Brent to remain range-bound at around $50-55 for first half of calendar year 2017, and hover around $50 levels in the remaining part of December.
Given the development, CRISIL expects the price of petrol to rise 5-8% and that of diesel by 6-8% over the next three - four months.
We have identified five sectors which will be impacted the most in the immediate-term if crude prices continue to rise in coming months:
1) Oil marketing companies (OMCs): Rising oil prices will hurt the margins and profitability of OMCs such as BPCL, IOC, HPCL, Castrol India and Gulf Oil Lubricants as they will have to factor in higher working capital requirements. They may also choose to pass on the higher raw material price cost to the consumers by way of a hike in fuel rates. However, A K Prabhakar, head of research at IDBI Capital doesn't expect the negative pressure to extend beyond one quarter. On the other hand, exploration companies like ONGC, Reliance Industries and Cairn India stand to gain.
2) Aviation sector: Airline companies may also see their margins coming under pressure as the aviation turbine fuel (ATF) prices will also eventually rise in line with crude oil prices. ATF constitutes more than 30% of airlines' expenditure. The surge in oil prices will increase the financial burden of cash-strapped carriers – at least till the time they pass on the cost to consumers.
3) Rate-sensitive sectors: Although the demonetisation of higher currency notes pushed the retail and wholesale inflation down in November, the inflationary pressure may return with the prospects of crude oil prices inching up, nudging the Reserve Bank of India (RBI) to maintain status quo on the interest rates. Rate-sensitive sectors such as banking, real estate and automobiles will bear the brunt of the same.
4) FMCG: The rising oil will also exert pressure on fast moving consumer goods (FMCG) makers, as a surge in petrol and diesel prices will push up their input costs. The sector is already facing some pressure in the wake of the government's demonetisation move even as the above average monsoon this year and seventh pay commission and OROP awards were expected to boost profits of consumer companies. “Immediately we don't see an impact on FMCG firms, but in case there is a significant increase in the transportation cost on account of rising petrol and diesel prices, they may pass on the burden to the end consumers by increasing the respective product prices marginally,” said Gaurang Shah of Geojit BNP Paribas.
5) Tyre and paint firms: Rising crude oil prices will be inflationary for tyre and paint companies too. With rubber prices going up, tyre firms may face a double whammy. The impact of demonetisation along with an increase in raw materials due to surge in oil prices and depreciating rupee will be negative for tyre and paint firms, said Prabhakar.
