On Monday, Brent futures touched the highest price jump ever since 1991 to reach $71 per barrel in Asia. The Jump accounted for 19.5% price hike in a single day. This gain is being said to be the biggest gain in percentage terms since 1991.

Brent Crude is a major benchmark for trading classification of sweet light crude oil for purchasing purposes. The grade is described as a light-based on its relatively low density, and sweet because of purity & low sulphur content.

The hike in the prices of oil is the result of the attacks that took place in Saudi Arabia on the world’s two biggest refineries at Abqaiq and Khurais oil facilities. Reports suggest that the attack has been undertaken by the Yemen Based Houthi Rebels, linked to Iraq. This is has been sought as a consequence of the geopolitical crisis between the US and Iran. As being said, this crisis may not end up soon.

This generates a problem for the host of Indian industries which inputs crude derivatives as raw-material. These industries are engaged in the development of aviation fuel, paints, tyres, oil & gas (OMCs) along with auto ancillary firms.

The two facilities hit by the Drone attack on Saturday, 14th September, Abqaiq is more vital as it processes 7 million barrels of hard crude per day into light crude. Other refineries in the industry are responsible for refining light crude and are dependent on Abqaiq’s light crude supply for their raw material.

Abqaiq and Khurais oil facilities are responsible for the supply of over half of Saudi’s Crude Oil production and around 5 per cent of total global crude supplies. However, as being reported by the Saudi Officials, the fire has been under control and the production is expected to resume in coming 2 days. However, as satellite footages and ground video suggests, the scenario seems a little more severe.

Further, it is being said that Saudi Arabia is planning to shut down about half of its global crude oil supply after the airstrike. This news has had a severe impact on oil prices. As a result, the stock prices of the leading companies have hiked whose outputs rely on crude oil inputs.

Effects on Indian Stocks

In the Indian domestic stock market, weakness was visible on oil-linked stocks; aviation firms like SpiceJetNSE went down by 3.95 % and InterGlobe Aviation fell up to 5 per cent. Further, major paints producers Asian PaintsNSE saw a low of 1.74 %, Berger PaintsNSE by 0.57 % and Kansai Nerolac lost up to 3 per cent. Further, the oil marketers of India, BPCL (Bharat Petroleum Company Limited) and HPCL (Hindustan Petroleum Company Limited) lost 5.72 per cent each while IOC (Indian Oil Corporation) fell 3 per cent on their stock prices on NSE (National Stock Exchange).

However, as described by Emkay Global, this rise is beneficial for GAIL & it could gain a positive impact. Further, he added that a $65-70 a barrel range is ideal for ONGCNSE (Up by 1.44 %) and Oil Indians (Up by 0.29 %.).

Effects on Indian Economy

India is a country which relies on imports for meeting 80 per cent of its oil demand, of which major parts comes from imports from Saudi based oil suppliers. Hence, any further issue in the crude price rise may hamper government finances severely.

As suggested by experts, for every $10 rise in the price of per barrel of crude oil, will push India’s current account deficit (CAD) by 0.4 per cent of GDP. Also, for every 10 per cent increase in crude oil prices, India’s inflation rate will be pushed up by 20 basis points. India is already undergoing a slow recession. Hence, the current rise of 19.5% has affected India’s inflation rate to move up 38-40 basis points.

Apart from this, India’s Rupee-Dollar relationship has been weakening for a long while and has helped rupee pushed to as high as Rs. 75 mark against the dollar. The cut-off crude oil supply & hiked prices will hurt the rupee-dollar exchange rates. It will also distract foreign investors from investing in rupee based investments and make Indian investments look unattractive.

Expert’s Opinion 

Stock Market Expert Sunil Jain who is the Head of Research at Nirmal Bang Securities suggests that the tyre and paint industry may get impacted by the crude derivative’s price hike, only if the price sustains the escalation substantially. However, oil marketer companies (OMCs) and aviation stocks will be under pressure even if the price hike is for a shorter period.

As per Kotak Securities, the lack of oil buffer due to the cut-off in Saudi’s significant spare production capacity will add to global oil supply woes. The already curtailed supplies from Iran and Venezuela due to US sanctions & vulnerable supplies from Libya and Nigeria have been disrupted over the years hampering the oil supply & prices in India.

Commenting upon the sustainability of the hiked oil prices, Pritam Kumar Patnaik, Head of Reliance Commodities said, “The immediate range for Nymex crude will be $56 to $63 a barrel, but with the US accusing Iran of orchestrating the attack and Iran in turn threatening war, oil prices are expected to remain firm.”

The Brokerage added in a comment that a $10 raise in global per barrel crude prices will require OMCs to increase retail prices of diesel and petrol by Rs 5-6 litre within 5 to 10 days (Coming fortnight). He also told that the sharp jump in global crude oil prices will pressurize refining to reduce their margins. However, upstream PSUs and GAIL, on the other hand, will receive positive setback from the price increments.