Commodity Analysis

The crude oil crash – who gains, who loses

Anand Kalyanaraman BL Research Bureau | Updated on March 09, 2020 Published on March 09, 2020

India macros will benefit ― oil producers will suffer, mixed bag for refiners, stake-sale deals at risk

 

Crude oil prices have fallen off the cliff over the past two days ― Brent crude oil now trades at about $35 a barrel, a multi-year low. The crash follows the no-agreement late last week among the members of the OPEC+ group (primarily Saudi Arabia and Russia) on output cuts to stabilise already weak prices. Demand destruction worries due to the global spread of Coronavirus had already taken a toll ― Brent crude oil had fallen from about $65 a barrel as of end-December to less than $50 a barrel by late last week. The rout has now worsened with the unravelling of the OPEC+ group, a key cartel producing a chunk of the world’s oil.

 

An all-out price war seems to have broken out now ― with Saudi Arabia firing the first salvo by slashing its official selling price and indicating a major ramp-up in its output. Russia and other major producers will likely follow suit. A three-way tussle for market share gains by lowering prices seems to be on the cards ― with Saudi Arabia, Russia, and the US set to wrestle it out. All producers will feel the financial pain of the oil price crash, and many shut-downs and bankruptcies can be expected as a result, especially in the US shale industry and in smaller producing countries.

Good for India macros

For India though, this price crash brings relief. Oil is among the country’s largest imports; India imports more than 80 per cent of its oil needs. With the economy currently passing through a tough phase, low oil prices can help bring down inflation, subsidies, fiscal deficit and forex outflows, thus, providing a breather to the exchequer. On the other hand, remittances from non-resident Indians (NRIs) in West Asia into India could drop.

Sectors that benefit

Sectors such as aviation, paints, tyres, fertilisers, lubricants and textiles, that use oil and oil derivatives as raw materials, could also benefit from lower input costs. In particular, for the airline sector which is taking a hit from a fall in travel demand due to the coronavirus, this oil price crash could provide a much-needed breather. Amidst the stock market rout today, airline stocks such IndiGo Airlines and SpiceJet are up 3-4 per cent, while paint stocks such as Asian Paints and Berger Paints, and lubricant stocks such as Gulf Oil Lubricants are holding flat.

 

Oil companies to take a knock

But there will also be losers from the carnage in oil prices. Top of the list are the PSU oil & gas producers ONGC and Oil India. These stocks have already been hammered over the past many months due to poor financial performance ― the result of low oil prices and weak output. For the nine months ended December 2019, ONGC’s consolidated profit has fallen about 35 per cent y-o-y, while Oil India’s profit has dipped about 33 per cent. The ongoing rout in oil will likely mean big losses in the ongoing March quarter too and beyond. No surprise then that the ONGC stock is down about 12 per cent today, and the Oil India stock is down about 9 per cent.

On the other hand, the stocks of the PSU oil refiners and marketers ― Indian Oil, HPCL and BPCL ― are up today. BPCL and HPCL are up about 9 per cent, while Indian Oil is up about 2.5 per cent. The expectation is that low oil prices could translate into higher refining and marketing margins for these companies. On the flipside though, these companies could also suffer major inventory losses due to the crash in prices of crude oil and the likely decline in the prices of refined products such as petrol and diesel. Weak global demand conditions for refined products could also dent refining margins. While these stocks have gained today, they have been hit sharply over the past few months and are down 13-33 per cent since October-November 2019.

BPCL divestment risk

The crash of crude oil prices could have an impact on the Centre’s plans to get big money from the proposed strategic divestment of BPCL. One, the stock is significantly off its highs from late last year. Next, and more importantly, many big international oil and gas companies may lose whatever remaining appetite they have for big-ticket global acquisitions. For now, survival and riding out the storm may be on top on their priority list.

 

RIL-Saudi Aramco deal risk

A similar worry may be stalking investors in Reliance Industries (RIL); the stock is down about 9 per cent today. The market seems to be worried, whether Saudi Aramco will go ahead and as per planned timelines, with its proposed plan to buy 20 per cent in the refining and petrochemical business of Reliance Industries. A back-off or delay by Saudi Aramco could be a setback for RIL’s mega balance-sheet deleveraging plans.

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Published on March 09, 2020
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