Oil price rise to impact user firms

Once again crude oil prices started firming up. The price of benchmark Brent oil has gone up 35% from its 52-week low of $44.43 a barrel. In fact, it has gone up by 109% from its two-year low of $28.94 reached in January 2016.

Cartelisation among Organization of Petroleum Exporting Countries (Opec) and also between Opec and non-Opec countries has helped global oil prices to recover steeply.

According to the International Energy Agency, the Opec had a compliance rate with their output cut pledges of about 86%, which is one of the highest levels in the history. Further, significant improvements in the Gross Domestic Product (GDP) growth of the US economy, Chinese economy stabilising around 6.8%, a rise in material and resources prices, which, in turn, is leading to rise in headline inflation rates in many major economies, etc., have further complimented the recovery in oil prices.    

Of course, oil price is still down by 47% from its peak price of around $114 a barrel we saw in 2014.

However, the recent global cues indicate a possibility of another 10% to 15% rise in the oil prices in the short-term itself.

Opec forecasts higher demand for its oil in 2018 as its production-cutting deal with rival producers is helping in successfully getting rid of a glut.

In fact, the Opec secretary was quoted on media saying that major producing nations may take “some extraordinary measures” next year to rebalance the oil market.

Even the International Energy Agency says that global supply and demand for crude oil will be largely balanced next year, as growth in consumption helps erode a three-year-old overhang of unused fuel.

Of course, oil price may not see triple digit figure in near future like what we saw in 2008 and 2014 as alternate energy sources (wind and solar) are becoming cheaper. Emerging electric vehicles also threaten the scope for a sharp rise in oil prices.

Already it is amply proved by global analysts that the relevance of oil-intensity in global GDP growth is also moderating.

However, even 10% to 15% rise in oil price in the short-term – on top of over 100% rise in the prices from 2016 bottom - would dampen substantially the profitability of many users of oil and oil derivatives.

Many companies operating in businesses like transformer oil, plastic products, paints, etc. saw steep improvements in their profits in FY2107 over FY2016 due to oil price crash.

Some mid-sized companies posted    as high as 45% to 100% rise operating profits in FY2017 over FY2016. However, the second of half current fiscal would experience a severe dent on the profitability of many of these companies.

The writer is founder & managing director, Equinomics Research & Advisory Pvt Ltd

Cartelisation among Organization of Petroleum Exporting Countries (Opec) and also between Opec and non-Opec countries has helped global oil prices to recover steeply.

According to the International Energy Agency, the Opec had a compliance rate with their output cut pledges of about 86%, which is one of the highest levels in the history. Further, significant improvements in the Gross Domestic Product (GDP) growth of the US economy, Chinese economy stabilising around 6.8%, a rise in material and resources prices, which, in turn, is leading to rise in headline inflation rates in many major economies, etc., have further complimented the recovery in oil prices.    

Of course, oil price is still down by 47% from its peak price of around $114 a barrel we saw in 2014.

However, the recent global cues indicate a possibility of another 10% to 15% rise in the oil prices in the short-term itself.

Opec forecasts higher demand for its oil in 2018 as its production-cutting deal with rival producers is helping in successfully getting rid of a glut.

In fact, the Opec secretary was quoted on media saying that major producing nations may take “some extraordinary measures” next year to rebalance the oil market.

Even the International Energy Agency says that global supply and demand for crude oil will be largely balanced next year, as growth in consumption helps erode a three-year-old overhang of unused fuel.

Of course, oil price may not see triple digit figure in near future like what we saw in 2008 and 2014 as alternate energy sources (wind and solar) are becoming cheaper. Emerging electric vehicles also threaten the scope for a sharp rise in oil prices.

Already it is amply proved by global analysts that the relevance of oil-intensity in global GDP growth is also moderating.

However, even 10% to 15% rise in oil price in the short-term – on top of over 100% rise in the prices from 2016 bottom - would dampen substantially the profitability of many users of oil and oil derivatives.

Many companies operating in businesses like transformer oil, plastic products, paints, etc. saw steep improvements in their profits in FY2107 over FY2016 due to oil price crash.

Some mid-sized companies posted    as high as 45% to 100% rise operating profits in FY2017 over FY2016. However, the second of half current fiscal would experience a severe dent on the profitability of many of these companies.

The writer is founder & managing director, Equinomics Research & Advisory Pvt Ltd