Brent crude futures jumped 7% to settle at $74.23 per barrel on Friday, after briefly soaring over 13% to touch an intraday high of $78.50, as fears of supply disruption due to escalating tension between Israel and Iran rattled energy markets. Since India imports over 85% of the crude oil requirement, a sustained rise in oil prices may result in broader inflationary pressures. However, the exact impact hinges on how long prices remain elevated.
“It is too early to fully gauge the impact. A prolonged spike could put significant pressure on corporate margins,” said Narendra Solanki, fundamental research head, Anand Rathi Shares and Stock Brokers. He added that if prices retreat soon, the effect on companies will be minimal.
“We lift our three-month price target to $72.5, while our view and long term targets remain unchanged at Neutral and $60,” said Norbert Rucker, head economics, Julius Baer, in an email quote citing that structural setting of the oil market should remain unscathed.
Oil Marketing Companies (OMCs): Margin pressure looms
Companies such as Indian Oil Corp, BPCL, and HPCL may face shrinking margins. While higher crude oil prices raise refining costs, OMCs may not be able to fully pass on the impact to end users, leading to potential under-recoveries and profit erosion.
Oil & Gas Producers: Beneficiaries of the surge
Upstream companies such as ONGC and Oil India sell domestically produced crude at prices linked to global benchmarks. While sustained rally in oil prices potentially improve their realisations, the effect on their revenues, and profit margins will depend upon the government’s stance. For instance, it levied a windfall tax on profits of oil producers between July 2022 and December 2024 when crude prices rose due to the Russia-Ukraine conflict.Aviation: Soaring fuel bills
Aviation turbine fuel (ATF) or jet fuel, derived from crude, forms over one-third of an airline’s operating cost. A rise in crude prices inflates fuel expenses, putting pressure on the bottom lines of carriers. Airlines may respond by increasing fare, but at the risk of dampening demand in a price-sensitive market.
Paints: Costs could dull profitability
Paint manufacturers like Asian Paints, Berger Paints, and Kansai Nerolac depend on crude derivatives such as solvents and resins, which form nearly 50% of total costs. Rising crude prices could force companies to increase retail prices, potentially hurting demand and market growth.
Chemicals & Petrochemicals: Feedstock woes
Naphtha, ethane, propane, and other crude derivatives are essential feedstocks for producing plastics, synthetic fibres, solvents, and a vast array of chemicals. Raw material cost is nearly half of the total revenues for chemical and petrochemical firms. Companies like Pidilite, SRF, Aarti Industries, and Deepak Nitrite will face a surge in raw material costs if crude prices stay elevated for a longer period.
Fertiliser companies: Energy cost overhang
The production of nitrogen-based fertilisers, particularly urea and ammonia, depends on natural gas and oil as feedstock.
Rising crude often pulls up LNG (liquefied natural gas) prices, making fertiliser production more expensive. This could lead to higher retail prices and a larger subsidy burden for the government.
Automobiles: Input costs up, electric vehicles get a boost
Automobile manufacturers may witness a rise in costs due to more expensive plastics, rubber, and composites-all derived from petroleum. While this could put pressure on the profit margins of traditional automakers, the surge in fuel prices could enhance the appeal of electric vehicles (EVs), giving the manufacturers of electrics a relative advantage.
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