Rising crude prices may play spoilsport on Dalal Street

Experts Warn ‘Costly’ Crude May Hit Cos’ Margins & Cause Macro Problems

ASK fund managers what their biggest near-term macroeconomic concern is, and most likely rising crude oil price will top the list. Brokers and money managers caution that a further rise in crude oil prices can trigger a downturn in share prices. Apart from hurting corporate profit margins through higher raw material and transportation prices, high oil prices will widen the country’s fiscal deficit, causing other macro-economic problems in its wake.
But the stock market appears to be indifferent to the problem for now, as seen from the steadily rising Sensex which closed above the psycho-logical 20,000-mark for the first time in over a month.
Oil prices have recently broken out of the narrow range of $75-85 per barrel seen for over a year, and are now nudging $90 due to liquidity infusion from the US, higher demand and falling inventories.
“The latest round of quantitative easing has fuelled investments in commodities on hopes of a recovery in US and Europe,” says Vikram Kotak, chief investment officer, Birla Sun Life Insurance, adding, “If this liquidity and momentum drives crude above $100, there will be pressure on the country’s current account deficit and also on corporate earnings.”
Some companies will be able to absorb the increase in raw material prices and even pass it on to their customers. But there will be others, who will be unable to pass it on either due to competitive pressures or government rules.
For instance, oil marketing companies which sell diesel, LPG and kerosene at a discount to cost price, will suffer huge losses. Upstream companies such as ONGC and Oil India will also suffer as they too have to share a part of the deficit. ONGC chairman and managing director RS Sharma had recently said that oil prices higher than $70 per barrel would work against the company.
“Raw material costs sectors like paints, tyres, textiles with the rising crude oil prices will go up,” says Sarabjit Kaur Nangra, VP-Research, Angel Broking.
“Many companies are expected to pass on the cost to the end user. While some may do it immediately others may be able to do it only with a lag effect,” she said.
The Empowered Group of Ministers (EGoM) headed by finance minister will meet shortly to review diesel prices. However, Ms Nangra feels that the government is unlikely to raise diesel prices “in the near future, especially given the persistent inflationary pressures”.
In addition to state-owned oil marketers, airline companies will feel the pinch of high fuel prices, as aviation turbine fuel accounts for 35-40% of expenses. ATF prices have risen 12-13% since October to around $765/ kilo litre.
However, the current quarter numbers of airline companies will not reflect the strain as passenger traffic was robust because of the holiday season. But a high oil price is good news for unregulated oil producers such as Cairn, Reliance Industries and Selan Exploration. Similarly, it could lead to increased exploration activity, benefiting companies like Great Off-shore, Aban Offshore and Shiv Vani Oil.