What does $100+ per barrel crude mean for India
What's the story
Crude oil prices have hit a four-year high, crossing the $100 per barrel mark. The spike is largely due to supply disruptions caused by the ongoing West Asia conflict. For India, which imports nearly 90% of its crude requirements, this could have significant implications. The first question that arises is what would happen if oil prices remain above $100 for an extended period of time.
Economic implications
Oil price shock impact
The impact of an oil price shock is usually felt in phases, starting with supply disruptions and eventually affecting fiscal balances, corporate earnings, as well as consumer prices. The current spike is mainly due to fears of supply disruption through the Strait of Hormuz, a major global shipping route. Probal Sen from ICICI Securities said that the market is now trying to understand how much supply could be disrupted.
Imports
Current account deficit, rupee under pressure
Higher crude prices directly translate into a higher import bill for India, which imports some five million barrels of oil per day. The jump in prices from below $60 earlier this year to over $110 now could mean billions of dollars in extra outflows if these levels persist. This would put pressure on the current account deficit and the rupee, according to Madhavi Arora of Emkay Global Financial Services.
GDP impact
Economy more insulated from oil shocks now
Arora noted that every $10 per barrel increase in oil raises the current account deficit by some 0.5% of GDP on a static basis. However, a note from HDFC MF on January 27 said oil imports as a percentage of India's GDP have decreased to around 4.8% from nearly 8.5% around 2012. This is due to several factors including faster economic growth and energy efficiency improvements.
Market impact
Corporate earnings affected by crude spike
Corporate earnings are also affected by a crude spike, especially for oil marketing companies. Shares of HPCL, BPCL, and Indian Oil Corporation fell 5-6% as higher crude raises raw material costs, while pump prices often remain unchanged for some time. Not all crude price spikes are immediately passed through to consumers due to government involvement in price management.
Price forecast
Crude prices may peak at $120-130 per barrel
Sandeep Tandon of Quant Mutual Fund said options market signals indicate that the spike may already be largely priced in. He expects crude prices to peak at around $120-130 per barrel but may not fall sharply. "It can remain elevated, but it has a potential for a peaking characteristic," Tandon said. He believes this spike is temporary rather than structural and may not last beyond this quarter.