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Rising crude oil prices emerge as a critical determinant for the Indian economy and for quite a few industries considering that India is a prime importing country of oil.
There were major price fluctuations from 2020- 2024 as given below and some key reasons for crude oil price fluctuations are as follows.
● 2020 (-20.64%): The steepest contraction by far driven by the COVID-19 pandemic, the price war between Russia and Saudi Arabia, and oversupply.
● 2021 (+55.01%): Strong Recovery largely driven by factors such as economic growth and OPEC+ production cut.
● 2022 (+7.05%): Russia-Ukraine conflict, sanctions, and supply chain disruptions cause moderate inflation.
● 2023 (-11.40%): Global recession fears, increased production, and energy transition weakened demand.
● 2024 (-2.41%): Minor weakness due to stable supply and weak demand; geopolitical concern.
The graph is as follows
The financial effects are visible across industries, and the stock market performances are reflecting the pressure. Major changes in Indian Industries are due to the following sectors.
Oil Refining and Marketing Companies
The surging crude compresses the profit margins of refinery companies such as BPCL, which controls retail fuel prices. There's even a decline in significantly heavy profit-making due to high crude oil prices because state-run refiners include Hindustan Petroleum Corporation Limited (HPCL). HPCL's standalone net profit declined 94% year over year to 3.56 billion rupees in the first quarter ending June 30, 2024. Average gross refining margins declined to $5.03 per barrel from $7.44 per barrel in the same period last year.
Upstream Oil Producers
But, for the upstream companies, including ONGC, would love this rise in price. ONGC saw a 20 percent jump in quarterly profit to ₹89.38 billion with crude oil realization to rise to $83.05 a barrel. Of course, bottom lines will be dependent on many things like production costs, and also government policies.
Aviation Sector
This very aviation turbine fuel (ATF) dependent industry is under extreme pressure from cost factors. Since fuel forms a major proportion of operational costs, it is vulnerable to the increasing price of oil. Airlines like Inter Globe Aviation (IndiGo) face increased operational costs, necessitating a careful balance in adjusting fares to cover these expenses without deterring demand. This is an extremely delicate task, one that is crucial to keeping profitability in a highly competitive market.
Paint Industry
The paint industry heavily relies on crude-based raw materials. With a surge in oil prices, the same is expensive and therefore is adding to the costs for paint manufacturers. This will not help expand the profit lines because such additional costs are hard to transfer to consumers. Companies that have derivative-based businesses in this sector, like Asian Paints, have borne the brunt of this as their crude has suffered from erosion. This has, in turn, caused a sharp rise in the cost of input, squeezing in the profit margin.
Economic Impact
The most affected industries have been on high crude oil prices driving in inflation, rupee ruination, and increasing trade deficit. Recently, the rupee touched an all-time low to the dollar at 83.97, which places more pressure on the economy. It says that an increase of $10 for every dollar in oil price has a significant macroeconomic impact that is there is rise in the current account deficit by 0.55% and growth in the consumer price index (CPI) by 0.3%.
The prices of crude oil are steady though the dynamics of Indian industries change. ONGC is yet to deliver upstream performance through headwinds, in the sense, the prevail downstream is in aviating, paints, and cement. For the time being, the investor will have to be watchful of this dynamic between crude oil and industry because the very same dynamic causes risks and opportunities for the investor.
Thankyou.
Regards,
Kautilya, IBS Mumbai.
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