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What $100 oil means for your investment portfolio

What $100 oil means for your investment portfolio
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By Sonal Sachdev  May 22, 2018 2:15:15 PM IST (Published)

If the government decides to share some of the burden, in a pre-election year, with state-owned oil majors — keeping the consumers insulated — the impact could be far less significant.

Oil by its very nature is inflammable. And when it rages, you can expect it won’t leave anything it impacts, including your stock portfolio, unsinged.

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Maybe not $100 yet, but global brokerage house Morgan Stanley in a recent note called $90 as a distinct possibility by 2020. “Middle distillate demand is growing strongly and inventories are approaching 5-year lows… We foresee a scramble for middle distillates that will drive crack spreads higher and drag oil prices with it. We argue that middle distillate prices will need to rise to a level where demand slows. We suspect this will be the case when gasoil reaches ~$850/tonne, around 25-30% above today's level. We estimate this will drive Brent higher to ~$90/bbl,” said the note.
Measuring the Impact
So, what would this translate to in terms of impact? A note by SBI Ecowrap provides a few pointers: a $10 barrel increase in oil price increases the import bill by $8 billion (pressure on the rupee); pushes inflation up by 30 basis points (bps) (100 basis points = 1%), spelling higher prices; impacts GDP growth by 16 bps (hurting economic recovery); raises fiscal deficit by 8 bps (hits government finances).
With oil at near $80/bbl today, you can double the above impact at $100/ bbl. That’s a 60 bps hike in inflation and a 32 bps impact on economic growth. And this is not good inflation — one that drives up prices due to increased demand — but a bad, cost-push, inflation that crimps demand and growth.
Factor in lower growth and higher input costs, and corporate earnings that are just about recovering from the twin impacts of the rollout of demonetisation and GST could come under pressure. Oil has wide implications for a wide range of sectors. Transportation is a clear hit — travel by cabs, airplanes, rail to get costlier; freight rates to move up.
This would impact airlines, logistics companies and sectors such as cement and agri-commodities, which have high volume, low-price products. Oil is also an input in petrochemicals, plastics and other chemicals, input costs for all these industries will rise, with cascading effects. Even road infrastructure developers may need o grapple with higher bitumen costs.
Ball in Government’s Court
Financial sector players could also be impacted if consumer confidence suffers owing to rising inflation and any uptick in interest rates. This is provided the price rise is completely passed through to the consumers.
If the government decides to share some of the burden, in a pre-election year, with state-owned oil majors — keeping the consumers insulated — the impact could be far less significant.
Nevertheless, oil boiling is not a good sign for the health of your portfolio. If you start thinking on a dollar-adjusted basis, your holdings could be even more severely impacted as the rupee depreciates. And while gold has never been a favourite for most investment professionals — being a no-yield asset — there’s a hedge.
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