Rise in Price of Crude oil Affects trade, Economy and Stock Market

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India is the exclusive merchant of goods ($126 billion in 2017) and oil ($74.7 billion) is the most influential category among imports. India imports 86% of its yearly crude oil demand. Since the payments are done in US dollars, India’s debt will depend on crude rates as well as on the USD/INR exchange rates.

Oil makes one of the pillars of the global economy. It is important to the functioning of a globalized society. Everything, from making tools move to plastics, can be drawn to oil or some byproduct. Oil makes its influence felt on nearly every individual’s life and gives ripples through the stock market. The impact of oil is not on one track though, and disentangling all the impacts is not easy. In the end, it is hard to be sure if a particular effect is due to oil or some other circumstance.

Effect of crude oil on trade 

Globally, crude oil is one of the most powerful fuel sources and, historically, has added to over a third of the world’s energy expenditure. Finding, extracting, transportation, and refining crude is a lengthy process, and the infrastructure needed to help the process must be in position. This includes thousands of miles of oil pipelines across nations, warehouse facilities in main oil trading hubs, and various refineries. In short, the global oil business is a multi-trillion-dollar business.

Oil is particularly important to companies that massively rely on fuel, such as airlines, chemical producers, and agricultural industries. Being such an essential source of energy, crude is a significant import and export product of many countries. The importance of this commodity forms a vast commercial trading market for oil and oil derivatives such as futures, forwards, and options.

What Decides Crude Oil Prices?

Light crude is easier to clean and creates higher amounts of high-quality gasoline and diesel fuel. It also moves freely at room temperature. The heavier and more solid the oil is, the more difficult it is to carry. Crude labeled as extra heavy can also be referred to as bitumen. It is so heavy that it must be thinned to transport.

When deciding the price of crude oil, oil benchmarks are applied as a pricing mechanism. There are several benchmark prices that answer specific oils, each with a well-defined density and API gravity. The most generally accepted benchmarks are West Texas Intermediate oil and Brent. Having an attainable price that corresponds to a particular geographical location, weight, and gravity enables analysts to compare and decide the prices of different crude oils.

Apart from the supply and demand, oil prices are also reliant on dangerous traders. Oil fates are one of the actively traded products similar to the F&O market. The unexpected decline in crude oil costs from $145 in July 2008 to $36 in December can be marginally associated with the F&O market.

Effect on companies

All businesses have to consider oil in one way or another way. The higher cost of crude and its derivatives may influence the profit perimeters of many businesses. The profit margins are affected due to high oil rates for businesses across sectors such as refining, airline, cosmetics, tires, footwear, lubricants, cement, logistics, building materials and chemicals for whom crude or its derivatives are important inputs. Hence, the capacity of companies to maintain profitability will depend on their ability to take viable cost hikes.

Inflation

The increasing oil prices have an inflationary impact over the long term and ultimately, it produces ripple impacts on the economy. The common men sense the pinch in their everyday lives as payments will have to neutralize for this increase in inflation. Higher wages can create inflation because it raises the cost of goods and services thus boosting inflation.

An increase in shipping cost

A rise or drop in crude oil prices influences the transportation cost of goods. Crude oil rates have a significant impression on the prices of consumer durables. These goods are produced in industrial units and then traded in various centers across India. A loss in the logistics cost of these goods will take down their closing price. A fall in the costs of consumer goods increases its demand and thus the stock price.

 

Crude price impact on Indian economy:

The higher crude price will have an adverse impact on the fiscal and current account debts of the economy. An addition in these deficits will point to higher inflation and also affect monetary policy, expenditure, and investment management in the economy. A 10% rise in oil price will improve the trade deficit by $7 billion, that is, the trade debt will increase by 560bps.

Upstream V/S downstream firms:

In the oil and gas business, companies are further classified into upstream or downstream, depending on their function in the supply chain.

Upstream firms are those who recognize, extract, or give raw materials that are utilized by downstream companies to cultivate them into diesel, gasoline, natural gas, pesticides, and other petroleum commodities.

Reduced fuel subsidy by the government:

As the oil costs rise, ONGC and Oil India may have to consume fuel subsidy. As the fiscal debt increases, the government would need to share the subsidy with these firms. In 2015, as the costs were lower, these firms did not contribute to fuel subsidy.

Whereas oil marketing firms were ordered to share less than 1 percent of total payments since 2012. As long as the crude rates stay below $60/barrel, the influence of fuel subsidy on these businesses would be minimal.

Stocks of interest:

The firm RIL holds 74.8 percent of its profits from petrochemicals business. It posted good December periodically results. It is constructively selling above its 50- and 200-DMA.

With regard to refining, the group reported Gross Refining Margin (GRM) of $8.8/bbl in Q3 FY 2019, beating Singapore network margins by $4.5/bbl. The company’s shipping of processed products grew by 19 percent y/y to $6.9 billion supported by volume extension of 5 percent to 10.8 MMT.

HPCL, IOCL, and BPCL are selling 53.1 percent, 40.1 percent, and 37.4 percent off-highs, sequentially, and below their essential levels of 50- and 200-DMA.

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