Russia-Ukraine War: Can crude oil reach $130/barrel and will it hurt India?

On Wednesday, the Organization of the Petroleum Exporting Countries (OPEC) and its allies including Russia agreed to continue with four lakh barrels per day of addition in output in April.

Most analysts believe the OPEC+ grouping's move during the Ukraine crisis is likely to keep oil rates elevated in the near term.

A series of Western sanctions on Russia over Ukraine doesn't include oil & gas as of now; US is open to imposing sanctions on energy flows

Oil producers are restoring deep cuts to output made at a time when pandemic caused a blow to oil demand

Easing of COVID-related restrictions has reignited demand as people have started to drive and fly more

Oil supply is yet to meet recovering demand

Before Russia-Ukraine war, developed economies made calls to OPEC+ to boost output beyond originally planned increases

US, Canada, Germany, France, UK, Japan have agreed to release strategic reserves to maintain balance in undersupplied oil market

There are chances of crude oil hitting the $125 per barrel level. That is the view of Peter McGuire, CEO of XM AUS. In an interview to CNBC-TV18, he said there is chaos in the physical oil market and volatility on the upside is parabolic. He is among the experts who expect crude oil to be "very volatile" in the near term.

There is a lot of convergence in analysts' estimates when it comes to oil rates, he added.

One can expect further upside in crude oil in the coming days, according to Manoj Kumar Jain, Director-Head Commodity and Currency Research at Prithvi Finmart.

"Brent is likely to test $125 a barrel. Higher crude oil prices will affect the Indian basket to a large extent and put pressure on the domestic currency," he told CNBCTV18.com.

For India, he expects inflation to worsen in the coming months, which may impact domestic economic growth. His remarks come days after official data showed India's economy expanded a slower-than-estimated 5.4 percent in the quarter ended December 2021. Economists in a CNBC-TV18 poll had estimated India's GDP growth at 5.7 percent in the three-month period.

Jain believes Brent could test $125-127 per barrel in March 2022 itself, with support at $104 per barrel.

Soaring crude oil prices will be a drag on the country's already burgeoning import bill, widen the current account deficit and lead to rupee depreciation. said Sugandha Sachdeva, VP-Commodity and Currency Research at Religare Broking.

She said further gains in oil will lead to:

Higher cost of producing goods

Higher inflationary pressure

Impact on businesses, industries and the economy as a whole

In its last scheduled bi-monthly policy review, the RBI retained its CPI inflation forecast at 5.7 percent for the March quarter, and 5.3 percent for the entire FY22.

"Historical data suggests that every $10 per barrel upswing in the Indian crude basket price leads to a $12.5 billion increase in the current account deficit and a rise of around 24 basis points in inflation. Both have a reverberating effect on the economy and hurt the growth prospects," Sachdeva told CNBCTV18.com.

A one percent drop in exports and a six percent jump in imports widened India's trade deficit in February, data shows. Russia -- one of the top producers of oil -- accounts for 0.8 percent of India's exports.

"Overall fundamentals of the oil markets are still very constructive. Even if prices witness profit booking, crude oil looks to remain supported at around $75-80 per barrel from a medium-term perspective... Key support for the year ahead is pegged at $66 per barrel," she said.

Asked if consumers should brace for a hike in fuel prices anytime soon, Sachdeva said: "From the consumer's perspective, petrol or diesel prices are likely to remain flat at least for a week due to the impending state elections. However, a gradual rise in retail fuel costs is expected post-elections if oil prices continue to remain at elevated levels, which will further add to the rising price pressures."

Generally, oil prices tend to soften eventually despite geopolitical tensions, asserts Mark Matthews, Head of Research for Asia at Julius Baer. The impact of crude oil on the Indian economy is not as much as it used to be 10-15 years ago, he said in an interaction with CNBC-TV18.

He said commodity prices are contingent on the Russia-Ukraine conflict and can move about anywhere in the short term. The prices can "soften but not a whole lot", he said.

Meanwhile, escalating geopolitical tensions loomed large across the global financial markets one week into Russia's invasion of Ukraine. Moody's and Fitch have downgraded Russia to 'junk' status. MSCI has removed "un-investable" Russia from its emerging market Indices, and the World Bank halted its projects in Russia and Belarus.

Indian equity benchmarks have retreated about 11 percent away from their all-time highs in October 2021, after coming within one percent of the peaks prior to the Ukraine crisis.

The war rattled the financial markets at a time when the bulls were already staring at the possiblity of faster and more aggressive hikes in pandemic-era interest rates. Concerns around high input costs, FII outflows, expensive valuations and a slow recovery from the pandemic lows also kept investors on the back foot.

"The outlook for Indian equities is certainly a bit more uncertain especially putting aside the geopolitical uncertainty in whether or not this develops into something much larger... Just the crude oil impact for us is something to be worried about," Bhavin Shah, Founder and Portfolio Manager at Sameeksha Capital, told CNBC-TV18.

However, in the midst of heightened volatility and nervousness among Dalal Street investors, many analysts are eyeing a few stock opportunities.

ONGC, for instance, is among the few stocks poised to benefit from rising oil prices. JPMorgan has retained a 'buy' rating on the company as it expects its profitability to get a boost from the upsurge in oil and gas rates.

Shah sees opportunities in financial, life insurance, chemical and pharma baskets.