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Which Indian Companies will be Affected by the Rising Crude Oil Prices?

Crude oil benchmark WTI (West Texas Intermediate) hit its 3-month high-price of $80 per barrel on Thursday, calling attention to oil prices all over the globe. The surge in the price comes post the announcements from OPEC+, which unexpectedly slashed production by 2.2 million barrels per day, in its meeting held on March 3, 2024. But how will this impact the Indian oil production and exploration companies and their stocks? Let’s dig deeper to understand.

Oil prices are more than just daily data and prices. Oil supports the operations of major industries around the globe. A slight change in oil prices can have a significant impact on industry production, thus affecting the economy overall. The complex dynamics of oil prices and how they affect the Indian economic narrative are frequently the subject of analysis and debate.

What is OPEC+?

Crude oil prices are majorly determined by the OPEC or the Organization of the Petroleum Exporting Countries. The OPEC is a 12 country member organization which includes the countries of Algeria, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, the Republic of the Congo, Saudi Arabia, the United Arab Emirates and Venezuela. These countries are the leading producers of oil, accounting for nearly 30% of the global output. Later in 2016, more countries joined the organization, which was collectively termed ‘OPEC+’. The new additions included the countries of Russia, South Sudan, Sudan, Malaysia, Mexico, Oman, Bahrain, Brunei, Kazakhstan, and Azerbaijan. The crucial objective of this organization is to monitor and decide on the supply of oil. Since they hold the supply knot, oil prices are indirectly influenced by the OPEC+ countries. It is the OPEC+ which decides how much oil will be explored, produced and sold in the global markets. Hence, when the organization decides to cut the supply, the prices tend to increase because the demand increases.

What influences oil prices?

Oil prices are influenced by a number of factors including the value of the US dollar, tensions in the Middle-east, OPEC+ production decisions, U.S. petroleum stocks, and expectations about Federal Reserve policies.

In its meeting held on March 3, 2024, OPEC+ decided to continue its voluntary reduction of 2.2 million barrels per day (bpd) of oil supply led by Saudi Arabia and Russia. Russia's additional reduction of 471,000 bpd and Saudi Arabia's continuance of its 1 million bpd cut, keeps the OPEC+ output at approximately 9 million bpd. These actions highlight OPEC+'s plan to manage the supply of oil in a market where demand is unpredictable. Since 2022, OPEC+ has reduced global daily demand by approximately 5.7%, or 5.86 million barrels per day.

How will the rising oil prices affect Indian companies?

Indian companies across several sectors are heavily dependent on crude oil. The decision to reduce oil production by OPEC+ gives a little scope for importing countries like India to level-up the production. With its production impacted, the supply shrinks, leading to increased prices for consumers. Let’s learn in detail the sectors that might be affected and why.

Paint- The manufacturing of paint requires several key ingredients, and many of these come from derivatives of crude oil. These derivatives are used for various purposes in paint, like solvents that help in maintaining the paint's liquid form until it's applied and starts drying. They're also used in the production of alkyd resins, which are a key component in many oil-based paints, providing durability and a nice finish.

When oil prices go up, the cost of these derivatives also increases because they are directly linked to the price of crude oil. This means that the raw materials needed to make paint become more expensive for manufacturers.

Companies like Asian Paints, Berger Paints, Nerolac Paints, and Indigo Paints, which are some of the leading paint companies, are impacted by these rising costs. They need these materials to produce their paint, so when the costs go up, it affects their production costs directly. This situation can lead to a decrease in their profit margins because the additional costs might not always be passed on to consumers. If the companies decide to increase their prices, they risk losing customers to competitors or causing sales to drop, which can also impact their profits.

Oil Marketing Companies – Companies like Reliance Industries, IOC (Indian Oil Corporation), BPCL (Bharat Petroleum Corporation Limited), and HPCL (Hindustan Petroleum Corporation Limited) are involved in the business of refining crude oil into various petroleum products (like petrol, diesel, jet fuel, and many others) and then selling these products to consumers. The cost of crude oil is a significant portion of their expenses because it's the raw material they need to produce all these different petroleum products. When global oil prices increase, the cost of procuring crude oil for these companies also goes up. This rise in procurement costs means that the companies have to spend more money to buy the same amount of crude oil, which is the first step in their production process. Now, if these companies decide to absorb the increased costs instead of passing them on to the consumers, their profit margins can get squeezed. So, if production costs go up but selling prices don't, the profit margin naturally decreases.

Aviation Sector - The aviation industry faces significant challenges from rising oil prices, as these directly escalate the cost of jet fuel, a critical operational expense for airlines. Companies like Interglobe Aviation, SpiceJet, and Jet Airways experience increased operational costs when oil prices climb, necessitating a careful balance in adjusting fares to cover these costs without deterring demand. The delicate task of managing fare is pivotal to maintaining profitability, as excessive hikes could reduce passenger numbers, leading to decreased profitability in a highly competitive market. To mitigate the volatility of oil prices, airlines may employ hedging strategies to lock in fuel prices, although this approach carries its own set of risks and costs. Ultimately, the ability of airlines to adeptly manage the repercussions of higher fuel costs is crucial for their financial stability and market position, underscoring the broader impact of oil price fluctuations on the aviation sector's economic health.

But it’s not like that an increase in the oil prices only has deteriorating effects on Indian companies. There are also companies who will benefit from this. Companies like ONGC, Oil India & GAIL are some of the names to mention. Why? Due to their engagements in the upstream sector of the oil and gas industry, which involves the exploration and production of crude oil and natural gas. Higher crude oil prices directly translate to increased revenues for ONGC and Oil India, as the crude they extract can be sold at higher prices, potentially leading to improved profit margins, given that production costs often remain relatively constant in the short term. For GAIL, while primarily involved in the gas sector, rising crude prices can indirectly benefit its operations through higher associated gas production and improved petrochemical product economics. These companies can also see enhanced stock market valuations and attract more investment, providing them with more capital to reinvest in exploration and development activities. However, the benefits come with challenges, including regulatory scrutiny and the volatile nature of global oil markets, which can rapidly alter the economic landscape for these entities.

Experts anticipate that crude oil prices might climb beyond $100 per barrel soon, driven by supply reductions and expectations of an economic rebound in China. Faced with the challenges of escalating oil prices, India has sought alternatives to mitigate these impacts. The country has primarily turned to Russia as its major oil source, taking advantage of the significantly lower prices offered. This strategic move is aimed at shielding India from the severe fluctuations of the global oil markets, providing a safeguard against the unpredictability of rising oil costs.