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Crude Oil Price Estimates and the Effects on India Stocks

Guest Author | 30 Jan, 2018  | Follow Author | Add to my Favourites 
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Crude oil has had an interesting few years. From the highs of $120 per barrel, to the lows of $40 per barrel, the fluctuations have had a significant impact on the economy of one of the most important powerhouses of Asia- India. India is one of the largest importers of crude oil, and therefore, price fluctuations ofthe ‘Black Gold’ have affected the bottom line of major companies trading on the Bombay Stock Exchange.

Crude Oil Prices

Crude oil prices fell sharply from the 2014 highs of $120 as a result of weak demand, a strong US dollar, and flourishing US shale production. It is a period that threatened both OPEC and non-OPEC countries that relied on oil export revenues. Production cuts were agreed among the countries, and the compliance has, thus far, been more than impressive. In 2017, crude oil averaged a price of $54, but the first week of 2018 has already seen the commodity briefly trade above the psychological price of $65.

What Will 2018 Bring?

A combination of factors has led both speculators trading oil, investors and other stakeholders to view 2018 as the year that crude oil finally retraces its recent years’ sharp decline, and market equilibrium between supply and demand is achieved. Global demand has been consistently rising, just like prices, and the technical picture is clearly bullish. The price of $65 (a 3-year high) is backed by solid fundamentals and is expected to support the price to circa $80-$90. The major reason for rising prices has been the production cuts implemented late last year by OPEC members, led by Saudi Arabia, as well as non-OPEC members, led by Russia.

The production cuts are set to run through to December 2018, so we can expect the bullish price momentum of crude oil to continue. Currently, only Nigeria and Libya are exempted from the production cut deal, but both countries are facing massive internal strife that may still yet impede their production.

Iran and Crude Oil

Still, Iran is the standout newsmaker. Despite indications that the US President may renege on a nuclear deal signed in 2015 to waive sanctions on Iran, this was not the case as Trump extended the agreement. This, though, came with a stern warning from the tough talking President who insisted it is the last deal he is signing if Iran fails to agree to what, even European allies, consider radical changes. The next date for such waivers will fall on May 12th, 2018, with multiple experts suggesting that the conditions set by Trump are close to impossible to meet. As such, this date will be very important for the crude oil chart, as prices may rally on anticipation of sanctions being imposed on Iran.

Medium Term View

The medium term technical view on crude oil is consistent with its fundamental forecast. Prices oscillated between $40 and $50 for a large part of last year. They finally broke above $50 when the production cuts were implemented in November. Since then, prices have largely trended higher and as mentioned earlier, they have managed to sustain above the long-term psychological level of $65. The prices are now well above the 8, 20 and 50 daily moving averages, with the next technical resistance likely to come at $80. Any pullback from current levels is likely to be limited at $60, below which, a technical floor of $55 might prove too hard to break, in view of the current bullish price action.

Impact on India Stocks

The price of crude oil has a far-reaching impact on the Indian economy. From influencing exchange rates and inflation, to impacting core corporate costs, crude oil prices reflect heavily on the stock market.Companies that will be particularly buoyed by rising prices are ONCG, Reliance Industries, Chennai Petroleum Corporation and Cairn India. Most of these companies are involved in both oil and gas exploration, but their bottom line is impacted mainly by refining crude oil. Rising crude prices will greatly improve their Gross Refining Margins (GRMs) as well as lead to greater inventory gains.

On the other hand, companies such as HPCL, BPCL, IOC, Jet Airways, SpiceJet and InterGlobe Aviation, are likely to be negatively impacted if oil prices continue to climb. These are mainly Oil Marketing Companies (OMCs) and Aviation stocks. For OMCs, rising crude prices do not translate to commensurate higher retail prices. This reduces their marketing margins, and investors will continue to punish their stocks as they feel they do not enjoy pricing power. For aviation stocks, the reason is straightforward: fuel bills account for about 50% of airline companies operating costs. Rising crude oil prices will impact their operating margins and it remains to be seen whether passenger growth numbers will counterweigh on that. Still, investors will not be kind.

Investors are therefore advised to keenly follow the price action on crude oil so as to manage and adjust their portfolios on the Bombay stock Exchange effectively.

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