On a slippery note !!

J. Paul Getty once said, “Formula for success: rise early, work hard, strike oil”. Oil is a vital source of energy for the world. Life without oil cannot be imagined. It has become a global commodity. Oil prices have a major impact on the global economy.

In the past decade, oil prices were rising since the supply did not keep pace with increased worldwide demand. But now, it is a completely different picture. Crude oil prices are now at a 6-year low in the international market. On June 23, 2014, the price of Brent Crude was at USD 115 per barrel. Now, global oil prices have slipped by more than 50%. The fall in oil prices has to lead to a significant revenue shortfall in many energy exporting nations like Russia, Venezuela, Middle Eastern Countries, Iran and Nigeria. For India, which imports nearly 80% of its oil requirements the slide in crude oil is a blessing. According to statistics, one dollar fall in the price of oil saves the country about 40 billion rupees. The price fall will ease India’s current account deficit.

NDA government at the centre has slashed petrol and diesel prices. Petrol and diesel prices were on Tuesday slashed by Rs 2.42 per litre, Rs 2.25 per litre respectively. As a result of the latest price revision, petrol will now cost Rs 56.49 per litre and diesel will cost Rs 46.01 per litre at the fuel stations in the national capital.

Crude derivatives constitute about a third of the raw material for paint companies. Hence, a fall in crude prices will result in better margins for those companies. On an average, a 10% drop in crude prices will improve gross margin by 200-300 basis points.

Auto companies too will benefit as petrol prices and the ownership cost of vehicles will come down. Crude oil derivatives such as carbon black, synthetic rubber and nylon tyre cord fabric also go into the making of tyres. Hence, tyre companies such as Apollo Tyres, MRF and ceat will gain from higher margins.

The impact of plunging crude oil prices is likely to remain neutral on FMCG companies. But petroleum derivatives form the raw material for packaging – tubes, bottles, covers, styrofoam, and also for diapers, shampoos, detergents, cosmetics, and perfume. Plastic manufacturers are also to benefit as they use polymers, which are derivatives of crude oil.

On the flip side, the slump in oil prices will adversely affect oil explorers such as ONGC. It has resulted in a 22% fall in the share prices of ONGC to the current level of Rs 350 per share from Rs 450 per share in September 2014. The margins of Cairn India are also likely to take a hit. The private sector employer gained from the higher oil prices in the past 3-4 years. The share price of Cairn India fell by 36.8% to the current level of Rs 240 per share from about Rs 380 per share in June 2014.

The oil fall has a huge impact on the economies of several countries including India. As India is a net exporter of crude oil, crude oil prices are a blessing for the Indian economy.

Click here for government certifications