In 2019, crude oil prices rose 36 percent. Eight days into the New Year, oil prices are again bristling after the US orchestrated a drone strike that killed Iran’s top general
Qassem Soleimani. On Wednesday, as was widely expected, Iran retaliated amid rising geopolitical tensions in the Middle East, triggering risks of a possible cut in the oil exports to other countries.
Over the past year, the price of oil has jumped nearly 25 percent according to Refinitiv data, escalating the costs for companies across the economy and leaving less money in the pockets of consumers. This has created an imbalance in consumer demand and spending, affecting the overall economy.
Though a scrum of sectors are affected by the spike in crude oil prices, core businesses that experience immediate effects are aviation, oil marketing companies, paint, cement, and FMCG (fast-moving consumer goods).
Aviation: This industry is always on the firing line as the lion's share of an airline's cost is aviation turbine fuel (ATF), which uses petroleum as its major production source. A rise in oil prices hurts airline companies and vice-versa.
Indian airlines such as IndoGo, the largest and competitor SpiceJet, had a forgettable 2019. If the spike in oil prices continues, pressure on the airlines’ raw material costs in the next quarter earnings will intensify.
Oil marketing companies (OMCs): OMCs are always squeezed when tensions brew in the oil business in the Middle East. Government-owned OMCs are already facing a dilemma for selling below current market rate.
If the government allows BPCL, HPCL and Indian Oil Corporation to raise prices based on international crude oil rates, the companies can look forward to a higher profit in their quarterly earnings. The surge in crude oil prices in the first week of this year sparked a fall in BPCL, HPCL, and Indian Oil shares prices, which declined 11 percent.
Paint: Vital ingredients of making paint are crude oil derivatives and titanium dioxide. What concerns the paint industry is the raw material. The year-on-year (YoY) growth in crude prices offers a bleak picture. Binders, solvents, and additives, which make up 75 percent of most paints are derived from major distillates of crude oil. Ergo, their costs are sensitive to crude prices. Paint companies benefit only if crude oil prices are in control. Cement: The cement industry uses a significant amount of energy especially high-grade petcoke in manufacturing. The recent spike in crude oil prices stands as a major disruptor for the cement industry as India is dependent on the Middle East for its oil imports. With the recent escalation of geopolitical tensions, the Middle East could force Iran to stop its supplies via Strait of Hormuz.
With the government’s push towards real estate with Rs 105 lakh crore in National Infrastructure Pipeline, cement is likely to be back in demand again. If oil prices continue to rise, the cement prices will also surge. Bad news for consumers.
FMCG: Any kind of retail product that is manufactured will need crude derivative as a raw material to run its engines. High-grade petcoke is used in the FMCG manufacturing units as well, which means a rise in oil prices will result in increased input costs and transportation expenses. With current consumption slowdown, increased prices for the consumers will only result in losses for the FMCG companies.