For India’s government led by Prime Minister Narendra Modi, falling crude oil prices turns out to be a blessing in disguise.
While the government struggles with a shortfall in tax revenue in a slowing economy, it received an unexpected boost from the fall in crude oil prices from an early January peak above $70.
The price fall is triggered by the specter of excess supplies loomed over the market after the spreading coronavirus outbreak hit demand in China, the world’s largest oil importer.
Brent crude hit a low of $53.63 a barrel before recovering to trade at $54.09, still down 38 cents. US West Texas Intermediate fell 38 cents to $49.94 a barrel after striking a low of $49.56.
Worries oversupply were not alleviated on Friday when Russia said it needs more time to decide on a recommendation from a technical committee that has advised the Organization of the Petroleum Exporting Countries (OPEC) and its allies to cut production by a further 600,000 barrels per day.
Last week oil futures finished lower to suffer a fifth weekly loss in a row, as strong growth in US employment failed to offset concerns over the global economy fed by the spread of the coronavirus.
A report on US employment Friday showed that the economy added 225,000 jobs in January, above the 165,000 jobs expected by economists polled by MarketWatch.
However, investors are more focused on whether the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, are going to do anything with respect to the supply. The markets need a supply cut.
The threat to the demand equation is huge from the coronavirus’s impact, and this is where major concerns are.
Against that backdrop, oil has been under pressure, sliding into a bear market — a decline of at least 20% in an asset from a recent peak — earlier this week.
On the business front, a fall in crude prices will cut down the operational cost of many companies that use direct crude or crude derivatives as the major raw material.
The sectors stand to benefit from the drop in crude prices are paint makers, aviation companies, lubricant makers, FMCG, refiners, etc.
The paint industry uses Titanium dioxide and Monomers (crude oil derivatives) as raw materials. The cost of the crude oil components is 30-35% of the paint companies’ raw material cost.
Asian Paints will benefit the most given its 54% market share in India, ahead of Berger and Kansai Nerolac with 18% and 17% share respectively.
Aviation Turbine Fuel (ATF) is the major raw material for aviation companies. It accounts for 50% of their operational costs.
Thus, the dip in crude prices is positive for the sector and will improve the profitability of aviation companies. IndiGo will be the biggest beneficiary.
Tyre makers would also gain from loser input costs. Crude derivative products such as synthetic rubber, chemicals and carbon black as key raw materials for Tyre makers, accounting for 30-35% of the raw material cost of tyre companies and any increase in these hits the profitability of the companies.
Similarly, crude derivatives form a big chunk of raw material cost for FMCG companies, lubricant makers.
Some of the crude derivatives used in FMCG business are HDPE for packaging, LAB for detergents and LLP for creams and oil.
Drop-in LAB and LLP prices will benefit detergent and personal care companies, whereas the fall in HDPE will reduce the cost of the overall sector.
Lubricant companies use crude oil derivatives like base oil and additives as raw material input have a reason to celebrate.
Refiners will benefit as lower crude oil prices translate into an improvement in refining margins.
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