Oil prices recently surged to levels last seen three years ago, with benchmark Brent futures approaching $85 per barrel. The key trigger has been a pickup in demand amid limited supply pushing Brent crude prices higher by 62.8 percent so far this year. Moreover, moderate increases in output by top producers and the US production still recovering from the fallout from hurricanes have boosted crude oil rates.
The rise in oil prices is a double whammy for India at a time when it is also facing its worst power crisis in years. India — the world's third-largest importer of crude oil — meets more than 80 percent of its oil requirement through imports.
Brent has surged 95.4 percent in the past one year. Here's how its journey has been:
Here's how Brent crude has moved in the past one year, from $43.2 a barrel on Oct 20, 2020 to $84.3 a barrel on Oct 18, 2021.While rising oil prices may mean higher costs for many industries, they are a blessing in disguise for others. Upstream oil majors are set to benefit from rising oil prices.
Winners and losers
Upstream oil companies are explorers and producers. They drill identify oil deposits, drill wells and extract oil. On the other hand, downstream oil companies process the produce provided by upstream companies to supply petroleum products to the end-user.
On the contrary, players from industries such as automobiles, aviation, logistics, paints, lubricants, plastic and tyre are set to bear the brunt of higher petroleum costs.
AK Prabhakar, Head of Research at IDBI Capital, said ONGC, Oil India and Chennai Petroleum (a unit of Indian Oil) along with other standalone refiners stand to benefit from the rise in crude oil prices.
Where is oil headed?
Most analysts believe the worst seems to be over for the oil market with regard to the pandemic, and expect the positive trend to continue backed by rising demand.
Crude oil can see a spike but supply should temper prices, Jonathan Barratt, Chief Investment Officer at Probis Securities, told CNBC-TV18. He believes crude oil rates are topping out.
To Sugandha Sachdeva, VP-Commodity and Currency Research at Religare Broking, an upside of 25-30 percent is possible in Brent given the supply bottlenecks, demand revival, gas-to-oil switching and speculative sentiments. Brent could march towards the $110/barrel level by next year "though it may not be a one-way ride with dips and corrections", she told CNBCTV18.com.
ONGC and Oil India benefit from higher price realisations, which is why the surge is positive for such players, said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services. Asked about those taking a hit from dearer oil, he said the actual impact on different companies depends on their pricing power and their ability to pass on higher costs.
"For instance, the aviation segment, already under stress, will find it difficult to pass on the increased costs completely. On the other hand, the paints segment, flourishing from the boom in construction and home improvement, can easily pass on the higher costs to protect margins," Vijayakumar elaborated.
"Similarly, leaders in the FMCG space will also pass on the increased costs of raw materials and packaging... Higher diesel and petrol prices are negative for auto companies particularly makers of passenger cars and trucks. But now, lower interest rates have turned out to be a strong tailwind for the segment, passenger cars in particular."
Impact on market
Typically, a sharp rise in crude prices has an adverse impact on equities as higher crude leads to higher inflation and higher interest rates.
"Interest rates and stock prices are inversely correlated, though it happens with a lag. But currently, the market is dominated by retail investors who are absorbing all institutional selling - both foreign institutional investors (FII) and domestic institutional investors (DII) - without much concern for valuations. So, the usual correlations may not work in the short run," he said.
(Edited by : Ajay Vaishnav)
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