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How Saudi Arabia oil attacks will affect the Indian Economy?


At 3.31am and 3.42am on Sept 14, loud explosions erupted at Khurais oilfield and Abqaiq processing facility, both owned by Saudi Aramco, one of the largest companies in the world by revenue and country’s state-owned oil company, often described as the kingdom’s crown jewel. These oil installations and tankers have been attacked by drones.

(Image: Planet Labs Inc via AP)


The explosions set off fires that took several hours to douse and appear to have caused significant damage. Saudi oil ministry sources said the production had been disrupted by about 5 million barrels a day — nearly half the kingdom’s estimated output of 9.7 million barrels and 5% of global production.

Results?

On Monday, Brent futures jumped nearly 19.5% to trade at $71 a barrel in Asia, clocking their biggest gains in percentage terms since 1991.

How it will affect the Indian Economy?

1) Aviation Industry: Fuel price will go up, Cost of Goods Sold (COGS) will go up and Net profit will get affected and so the stock prices.  Stock names: Interglobe Aviation, Spice Jet. 2) Tyre Industry: Synthetic rubber (SR) in the global market is produced from crude oil. If Rubber's price will go up, Cost of Goods Sold (COGS) will go up Net profit will get affected and so the stock prices. Stock names: Apollo Tyres, CEAT, Goodyear, Balkrishna Ind, JK Tyre and MRF. 3) Cement Industry: Most of the cement companies are currently using over 80% of petcoke (crude derivative) as fuel. So Petcoke Price will go up, Cost of Goods Sold (COGS) will go up Net profit will get affected and so the stock prices. Stock names: Ambuja, ACC, JP, Heidelberg, NCC, India Cement etc. 4) Paint Industry: Titanium dioxide and crude derivatives products form 50% of the raw material cost of paints so again Cost of Goods Sold (COGS) will go up Net profit will get affected and so the stock prices. Stock names: Asian Paints, Berger paints, Akzo Nobel etc 5) The effect will also be negative for downstream OMCs (BPCL, HPCL and IOCL) and Castrol.

6. Current Account Deficit (CAD): Every $10 a barrel rise in crude oil prices expands India’s current account deficit (CAD) by 0.4% of GDP.

7. Inflation: Every 10% increase in crude oil prices can push up the inflation rate by 20 basis points.


8. Rupee: Besides, a rise in crude oil prices can increase dollar demand, hurting the rupee-dollar exchange rate. A fall in the rupee lowers dollar returns for foreign investors and makes their India investment unattractive.

9. Imports: For a country like India which meets 80% of its oil demand through imports, any further rise in crude prices may have an impact on government finances.

10. Oil Price in India: A $10 a barrel rise in global crude prices may require OMCs to increase retail prices of diesel and petrol by Rs 5–6 litre in the following fortnight.

However the effect may not last long, as soon as Crude will stabilize, Everything will be on track. If Brent Crosses $70–72 then it may take much time to step back to 60s. Economists believe the oil price could rise higher if Aramco cannot bring supplies back online quickly, or if there is military action in the Gulf.

What should investors do? Investors shouldn’t panic and must stay invested as the effect will be temporary.

Because: Saudi Aramco has told Indian refiners that there will be no shortage in supplies, the Indian oil ministry said on Monday. The ministry said it was closely monitoring the situation and was in talks with Indian refiners and Saudi Aramco. Saudi Arabia is India’s top oil supplier after Iraq. In January-July, it supplied 788,200 barrels per day of oil to India.

Thanks! Akshay Seth Research Analyst (SEBI Regd.) akshay.equity@gmail.com Linkedin: connect here

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References:

https://www.livemint.com/news/india/india-bracing-for-oil-spike-impact-in-touch-with-saudi-aramco-1568619711736.htmlhttps://www.theguardian.com/world/2019/sep/16/saudi-arabia-oil-attacks-everything-you-need-to-knowhttps://www.moneycontrol.com/news/business/economy/saudi-aramco-assures-indian-refiners-of-no-supply-shortage-india-oil-ministry-4439921.htmlhttps://www.moneycontrol.com/news/world/saudi-aramco-drone-attack-see-damage-caused-to-oil-field-what-are-the-implications-4441191-2.html

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