OMC, aviation stocks fall as crude prices hit new 2-year high
Mumbai: While Brent crude cooled off slightly after climbing to a fresh two-year high at $64.23 per barrel on an anti-corruption purge by Saudi Arabia’s crown prince, shares of oil marketing companies (OMCs) and aviation firms reacted negatively on Tuesday. During the day, BSE Oil and Gas index fell nearly 2%.
OMC stocks Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd and Indian Oil Corp. Ltd were down 1-2%, whereas exploration company Oil India Ltd jumped over 1% on Tuesday. Shares of aviation companies also reacted negatively as rise in fuel prices add to the expenditure cost of these firms. During the day, SpiceJet, Jet Airways and Interglobe Aviation slipped 3-5%.
Ajay Bodke, chief executive officer and chief portfolio manager, Prabhudas Lilladher, said increased crude prices can lead to prices of crude derivatives moving up, impacting the raw material costs of companies across the sectors and leading to margin pressure.
In 2017 so far, crude prices have jumped 13%. Analysts said that rise in crude oil prices impacts equity markets as rising risks of fiscal slippage, greater inflationary pressures and lower likelihood of a rate cut by the Reserve Bank of India (RBI) in December prompt investors to review their positions.
Since June 2017 onwards, prices of Brent have been on the rise, on account of a drop in US crude inventories, stronger expected growth in demand this year, geopolitical tension between Opec countries and disruption in production caused by the cyclonic activity in the US. Since mid-July, Saudi Arabia, which is the largest oil exporter, pledged to lower crude oil exports and Nigeria has also been speculating about cutting down and limiting production levels of crude oil. Saudi Arabia was later backed by Kuwait, another member of the Opec cartel, in cutting the production levels of crude oil.
Analysts believe that with an extension of the Opec-Russia deal likely to continue till at least late next year, prices will find ongoing support. But on the flipside, an extended rally will see a strong supply response from US shale producers.