- Oil prices have crossed the $100 per barrel mark after Russian President Vladimir Putin announced a “military operation” in Ukraine.
- The BSE Sensex and the NSE Nifty fell by more than 3% today. Foreign Investors have removed ₹51,703 crores from Indian equities between January and February.
- Most companies will have to hike the prices of goods and services to recover the extra cost of oil and improve gross margins.
Oil prices are spiralling due to the Russia-Ukraine Crisis. They increased by 5% after Russian President Vladimir Putin announced a “military operation” in Ukraine, apparently realising fears he would invade. This will not only lead to a spike in inflation but also weaken the rupee, according to experts.
Brent crude oil prices have surpassed the $100 per barrel mark on Thursday, the first time since 2014. This is bad news for the Indian economy as its imports account for a lion’s share of its fuel requirements. This happened after Russian president Vladimir Putin ordered troops into eastern Ukraine. Benchmark crude prices have risen by more than 50% in the past year and are expected to remain firm.
Russia is the world’s largest oil producer and it mainly sells crude to European refineries.
“This growing uncertainty during a time when the oil market is already tight does leave it vulnerable, and so prices are likely to remain volatile and elevated,” said Warren Patterson, head of ING’s commodity research.
The Indian stock markets nosedived soon after. In early trade on Thursday, the BSE Sensex and the NSE Nifty 50 indices fell by more than 3%. Foreign investors have pulled out a net of ₹51,703 crores from Indian equities between January and February, leading to volatility in equity markets. Investor sentiments have taken a beating over the last few days.
The Rupee has fallen against the dollar from $73.8 to $75.33 on Thursday.
“We expect crude oil prices to remain volatile and rise from current levels if geopolitical concerns do not materially ease,” according to a report from Kotak Institutional Equities on 23rd February.
“We maintain our current oil price estimate of $80 per barrel in FY2023 for the time being while noting upside risks if ongoing geopolitical concerns persist over the coming months,” the brokerage added.
Higher oil prices have a negative influence on inflation and the current account deficit in India. However, oil companies like Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd benefit from the increase in oil prices. Both the companies did well in the recent quarter and ONGC’s share prices have appreciated over 40% in the past year.
Higher oil prices are detrimental to most companies, especially when they are battling cost inflation at various levels. Higher oil prices increase packaging costs for FMCG companies. Companies will have to hike prices of goods and services, and even then it might not help their gross margins.
Some analysts think that if consumers spend more on fuel, the demand for consumer discretionary products might get hurt. For some companies, an increase in oil prices means an increase in freight costs. For cement companies, there will be an increase in petcoke prices. Paint companies use crude based derivatives such as monomers, but paint companies have already hiked prices of paints in the last year. Analysts expect that the impact of this price hike will be seen in the March quarter results and will support margin recovery.
Aviation turbine fuel accounts for a big share of operating costs and therefore airlines are at a disadvantage. Shares of InterGlobe Aviation and SpiceJet were down by 5% in Thursday morning’s trade.
“If prices hold at current levels or rise further, cost pressures would further increase for a host of industries and household purchasing power would diminish, dampening the pace of the global recovery,” according to Moody’s Global Macro Outlook report published on 23 February. “We expect oil prices to gradually decline in the second half of 2022 and to fall further in 2023,” it added.
“India is seeing the prospect of ‘twin’ deficit – fiscal and CAD – simultaneously over the next 12 months.” “The imports surge is quite broad-based (non-oil, non-gold rising at 20% 2-year cagr now) and recovering local demand, along with high commodity/oil prices, could keep current account under pressure. We estimate CAD at 2.5% of GDP in FY23 (US$80/bbl assumption), 10 year high,” Jefferies India said.
“In FY22, the share of oil imports in India’s total imports has increased to 25.8 per cent (Apr-Dec ’21) as oil prices inched up. With oil prices on an uptrend again, the oil import bill is likely to swell further. This will have an impact on India’s external position. We estimate that a 10 per cent hike in oil prices will lead to an increase of India’s CAD by $15 billion or 0.4 per cent of GDP. This will have a negative impact on INR,” Bank of Baroda chief economist Madan Sabnavis said in a report.
