Crude oil-linked stocks: Shares of most paints and tyre companies as well as oil marketing companies (OMCs) came under pressure in the early trade on Wednesday, September 6, after crude oil prices rose a dollar per barrel on Tuesday to their highest since November 2022 after Saudi Arabia and Russia extended their voluntary supply cuts to the end of the year, worrying investors about potential shortages during peak winter demand.

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

However, aviation stocks such as SpiceJet and InterGlobe Aviation traded in the green. Furthermore, ONGC, Oil India, and GAIL—oil exploration companies—traded higher as they are key beneficiaries of rising oil prices.

Brent crude futures on Tuesday rose by $1.04, or 1.2 per cent, to settle at $90.04 a barrel, closing above the $90 mark for the first time since November 16, 2022. US West Texas Intermediate crude (WTI) futures gained $1.14, or 1.3 per cent, to settle at $86.69 a barrel, also a 10-month high, according to a Reuters report.

On Wednesday, too, in the early trade, oil prices ticked up.

Among individual names, Asian Paints was trading over half a per cent lower at Rs 3,206.15 on the BSE, while Berger Paints slipped over a per cent to Rs 701.45 in the early trade. Indigo Paints was trading 0.19 per cent lower at Rs 1,583.50. At close, Asian Paints stood flat at Rs 3,223.85, while Berger Paints ended nearly a per cent higher at Rs 715.95 on the BSE. Indigo Paints was up 0.09 per cent at Rs 1,588. Kansai Nerolac ended 0.53 per cent lower at Rs 336 on the BSE.

Among tyre stocks, MRF ended nearly a per cent higher at Rs 1,09,501 on the BSE while Apollo Tyres shares were down by 0.25 per cent. Goodyear India ended 0.30 per cent lower at Rs 1,348.20 on the BSE.

Crude derivates are a major raw material used in the production of paints and emulsions. Hence, an increase in crude oil prices means an increase in the prices of raw materials for the paint companies, which in turn is negative for them.

Similarly, rubber constitutes a major portion of the total cost for the tyre industry. Rubber manufacturing companies use crude oil derivatives as their raw material for making synthetic rubber. Hence, an increase in crude oil prices impacts the costs of raw materials for tyre companies as well.

Global Oil Market Outlook

The International Energy Agency (IEA), in its report dated August 8, said, "The Brent price in our forecast averages $86 per barrel in the second half of 2023 (2H23), reaches $88 per barrel in November and December, and remains near that level in the first quarter of 2024 (1Q24). Crude oil prices begin to ease in 2Q24 as supply growth leads to some rebuilding of global oil inventories later in 2024. The Brent price in our forecast averages $86 per barrel in 2024."

What brokerages say

JM Financial, in its latest report released on September 5, said that the OMCs’ valuations are reasonable, but they maintain a cautious view as of now as a sharp jump in crude price during elections poses a risk to their marketing earnings.

"We largely maintain our FY24–25 earnings estimate for OMCs; however, we cut the target price for a) HPCL to Rs 275 (from Rs 300); b) BPCL to Rs 400 (from Rs 450); and c) IOCL to Rs 85 (from Rs 90) due to a reduction in the EV/EBITDA multiple for the marketing business to 5.0x (from 5.5x) to factor in the risk to marketing segment earnings amidst a sharp jump in crude price ahead of a critical election phase in the next nine months," the report said.