Crude oil prices surged to nearly $120 a barrel earlier this week due to the war between the US and Iran. The ongoing conflict has disrupted energy production in the Middle East and resulted in a blockade of the Strait of Hormuz, which is a vital shipping lane. The effective closure of the Strait of Hormuz amidst the Iran war has unsettled global oil markets.
After reaching close to $120 on March 9, brent crude experienced a major decline on March 10, dropping to $89. However, as of today, March 11, brent crude oil has risen by 4.04% and is trading at $92.
Despite this, oil prices are still significantly lower than the highs seen on Monday, March 9 although brent crude, the global benchmark, had risen approximately 20% by Wednesday since the onset of the war, causing consumers globally to feel the squeeze at the gas station.
The surge in oil prices has been unsettling financial markets around the world due to concerns that the conflict might disrupt the worldwide supply of oil and natural gas for an extended period.
According to Choice Institutional Equities, if global crude oil prices stay above $130 per barrel, it could have major macroeconomic effects on India, given the country’s strong reliance on imported oil.
The brokerage highlights that the repercussions would primarily occur through two main channels—rising input costs and a slowdown in demand driven by macroeconomic factors.
Sectors that are energy-intensive may experience pressure on margins as costs for fuel, transportation, and logistics increase. Simultaneously, industries associated with discretionary spending and construction might experience fluctuations in demand if high crude prices lead to inflation and increase interest rates, potentially impacting overall economic performance and corporate profits.
Impact of elevated crude prices on upstream and downstream companies
For upstream oil producers, rising crude prices often lead to stronger returns and enhanced profitability. In a baseline scenario of approximately $90 per barrel, upstream firms gain from improved pricing while ramping up investments in infill drilling, well workovers, and enhanced recovery methods to counter the natural decline in mature fields. Choice Institutional Equities indicates that even a $1 increase in crude can significantly raise annual revenues for producers. In scenarios where crude prices reach $110–$130 per barrel, cash flows could grow considerably. Nonetheless, companies typically need sustained price clarity before they greenlight new upstream projects, given their long lead times and substantial capital requirements.
India relies on the Strait of Hormuz for nearly 50% of its crude oil imports, making disruptions in this area a significant risk for the refining industry. As noted by Choice Institutional Equities, ongoing tensions might compel Indian refineries to look for alternative crude sources from Russia or other regions, which could lead to a decrease in gross refining margins (GRMs), given that Middle Eastern crude is currently the most cost-effective option.
In a scenario where crude is priced at $90 per barrel, increased diesel cracks have bolstered refining margins, as international diesel prices have surged. Nevertheless, oil marketing companies are experiencing negative marketing margins. If crude oil prices exceed $100–$130 per barrel, limited increases in diesel and ATF prices may restrict further profitability.
Impact of elevated crude prices on Metals & Mining
Rising geopolitical tensions involving Iran, Israel, and the United States may contribute to fluctuations in crude oil prices over the next three to four months, which could indirectly affect India’s metals sector.
While metals manufacturers are not directly tied to crude oil prices, increased oil prices lead to higher costs for freight, energy, and logistics.
The sector consumes a considerable amount of energy, with power and fuel representing almost 30–40% of overall operating expenses. Higher crude prices can also diminish the value of the Indian Rupee, increasing the costs of imported raw materials such as coking coal and alumina.
Assuming a scenario with crude at $90 per barrel, steel demand could rise by 8–9%, keeping prices in the range of ₹48,000–52,000 per tonne and stabilizing margins.
Impact of elevated crude prices on Automobile
Increasing tensions in the Middle East are affecting India’s automobile export supply chain, with this region representing almost 20-25% of the nation’s car exports. As reported by Choice Institutional Equities, elevated war-risk insurance premiums and freight surcharges have driven up logistics expenses, while shipping delays of 10-14 days could strain profit margins.
Rising crude oil prices may also lead to higher costs for petrochemical inputs such as plastics and synthetic rubber, which constitute a significant portion of vehicle production expenses. Automakers including Maruti Suzuki India, Bajaj Auto, TVS Motor Company, and Ashok Leyland might experience pressure on their margins if the disruptions continue.
Impact of elevated crude prices on FMCG
Crude oil prices have experienced significant fluctuations, increasing from nearly $70 per barrel prior to the US–Israel strikes on Iran to a peak of almost $120, before settling around $91 following the Group of Seven meeting. Ongoing volatility may exert pressure on profit margins throughout the FMCG sector, particularly among Beauty & Personal Care companies where crude derivatives account for 30–40% of the raw material costs.
If crude oil prices reach $100–$130 per barrel, gross margins might decline by 100–250 basis points. Companies could react by implementing price increases in the high single-digit to low double-digit range, although this might temporarily affect sales volumes, while food-oriented FMCG companies are relatively less exposed.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
