Although the rise in oil prices is considered to be temporary, the Street is unlikely to take it lightly given the uncertainties. Economists at DBS Research say that the drone attacks may affect 50 per cent of Saudi production, but repairs and stock drawdown would prevent an immediate supply crunch. For oil prices to normalise, it may take a few weeks at least for restoration of the facilities and production rebounding back to previous levels, say most analysts. CARE Ratings though expects Brent crude oil to range between $70-75 in the coming few months till normalcy is restored to Saudi production. Nonetheless, there is risk of escalation of geo-political conditions too.
"With USA accusing the Iranian government of orchestrating the attack and Iran in turn threatening war, thereby further destabilising the region at large and further impacting future supplies, the oil prices are expected to remain firm," said Pritam Kumar Patnaik, Head Commodities, Reliance Commodities.
High oil prices may put also pressure on OMCs’ refining margins amid slowing demand, say analysts. Those at Kotak Institutional Equities also say that the possibility of moderation in marketing margins on auto fuels cannot be ruled out. A $10 per barrel rise in global crude and product prices may require OMCs to increase retail price of diesel and gasoline by Rs 5-6 per litre in the following fortnight. With concerns on refining & marketing margins, and working capital requirements, not surprising their share prices fell.
But, what’s bad for OMCs may be good for upstream companies such as ONGC, OIL India and GAIL which gained up to 1.4 per cent on the bourses. While oil producers are expected to see higher realisations for their produce, higher oil prices are positive for GAIL too. GAIL will also benefit from rise in demand for gas as prices of petrol, diesel, fuel oil, etc rise. A $65-70 a barrel range is ideal for ONGC and Oil India, say analysts at Emkay Global.
Among others, aviation is another sector which will be impacted by the surge in oil prices as it accounts 40 per cent of it’s operating costs. Every 100 basis points rise in oil prices increases operating costs of airlines by 40-50 basis points. This will weigh on the margins of listed companies InterGlobe Aviation and SpiceJet, especially at a time when passengers’ volumes are trending down. After 6 per cent year-on-year growth in June, passenger volumes grew by just 3 per cent in July. Weak volumes and higher operating costs could be a double whammy for the sector in a seasonally weak September quarter.
Paints and adhesives players such as Asian Paints, Berger Paints, Pidilite, among others, could also feel the heat as key raw materials such as monomer, prices of which are linked to crude oil, form a significant portion of production cost. In case of paints, for instance, it is around 30-35 per cent. Thus, a sudden surge in oil prices could hurt profitability and so earnings. Normally, there is a 3-4-month time-lag for oil prices to get fully reflected in input prices of these sectors. Thus, the impact could reflect in December quarter if the oil price situation prolongs. Pricing power enjoyed by paint and adhesive companies though could provide some relief. Therefore, how these companies exercise their pricing strategy given the recent price cuts by paint majors in some low-price products would be interesting to see.