Do your research and select companies that can withstand the impact of the price rise. Some sectors to look at are upstream oil companies, oil service providers, alternative fuel companies and those with rural consumption themes
Rising crude oil prices will not just burn a hole in your car’s fuel bill, but could also impact your stock market investments. The effect is factual rather than merely psychological. But the good news is that there are options for retail investors even in this gloomy scenario of rising crude prices.
The average price of crude oil has increased from an annual average of 40.68 dollars in 2016 to 67.33 dollars this year. India imports approximately 80% of her crude oil requirements and had an import bill of Rs 4.7 lakh crore in FY 2016-17 for crude oil imports.
Impact of rising crude price
Rising crude oil prices affect our import bill impacting the trade balance and fiscal deficit. It also adds to pressure on the rupee, which is another negative for the economy.
"Overall rising crude oil prices have inflationary pressure as a lot of sectors use crude derivatives as their raw materials and also logistics (transportation) costs increase. Thus equity markets view a rising crude oil as negative for the economy and therefore corporate,” said Siddhartha Khemka, Head of Retail Research, Motilal Oswal.
Rising crude prices is the one factor that is watched by market participants. “Factors like inflation brought about by rising crude prices and the consequently rising rupee etc, will hamper our current account deficit which will drag equity markets down,”said Foram Parekh, Fundamental Analyst, Indiabulls Ventures.
According to V K Sharma, Head - PCG & Capital Market Strategy, HDFC Securities, equity markets can live with higher crude prices. Businesses can thrive as long as they can pass on the increased cost to the consumers. It starts impacting when they are not able to pass on prices.
Crude oil impacts a lot of sectors directly and many more indirectly. It also impacts food inflation as there is a huge transportation cost that gets elevated with higher fuel prices.
“Anything that is negative for the economy is also negative for the stock market,” said Khemka about the actual rather than psychological effect of rising crude prices on India’s equity markets.
The general consensus is that there is a possibility of crude prices rising. At the very least they will be volatile. “Recent supply disruption from Libya and Canada and sanctions on Iran are pushing oil prices higher, but rising output from other areas is capping the upside by offsetting the loss in supply,” said Jayant Manglik, President, Religare Broking.
Where are crude prices headed
OPEC’s production has risen by around 320,000 barrels per day in June and is expected to increase further going forward in-line with their recent agreement to increase supply by 1 million barrels per day. Even US President Trump is persuading Saudi Arabia to increase production further, all in an effort to balance the oil market. Moreover, the demand, which has so far been very healthy and was driving prices higher, is seen softening from the major consuming region, Asia.
“Thus, a confluence of these factors is expected to keep crude prices volatile. However, technically, once the hurdle of $80 per barrel for brent is taken out, prices could move sharply higher towards $87 per barrel. On the flip side, failure to breach the said level could see crude prices slip back to $72 per barrel in the near term,” said Manglik.
Sharma sees brent crude (an industry benchmark) at just under $85 per barrel.
Possible gainers
Airlines, transport related activities, paints and downstream oil companies (oil marketing companies) are the people who will be hurt, while beneficiaries would include upstream oil companies (involved in production and exploration of crude), oil service providers, and alternative fuel companies.
Investors can still benefit in the equity markets even if crude prices rise. Analysts are firm that the Nifty (a key benchmark indice) will appreciate by at least 10-15% from current levels.
“Equity markets have many variables and crude is just one of these themes (driving the equity markets). The biggest driver is earnings, which we believe is on a recovery mode,” said Khemka of Motilal Oswal. According to him stocks that have a rural consumption base as a good buffer against rising crude oil prices for equity investments.
According to Parekh of Indiabulls Ventures there is no substitute for an investor doing his/her research. Look at parameters like ROE (return on equity), ROCE (return on capital employed), PE (price earnings) for investments.
Look at information technology , pharma, FMCG and insurance advised Sharma of HDFC Securities.
“Please don’t time (try to predict) the market,” advised Manglik of Religare. Sectors like cement, Non-banking Finance Companies, Fast Moving Consuer goods, consumer, IT and retail have the ability to shelter from the rising crude oil storm.
PICK STOCKS WITH CARE
- $87 per barrel
Brent crude oil prices can hit if the $80 per barrel is broken on the technical charts
- Look at parameters like return on equity, return on capital employed, price earnings while picking stocks
- Stocks with rural consumption theme will offer good buffer
- Companies that will benefit from rising crude prices include those involved in oil production and exploration, oil service providers and alternative fuel companies
- Cement, NBFCs, FMCG, IT and retail are other sectors one can consider
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