Rising oil prices may deliver a 'crude' shock; here are 3 factors to be cautious about

OPEC, and a few other major oil producers, including Russia, started to withhold oil production in 2017 in order to rein in the supply glut that had kept oil prices low since 2014. Reuters reported on Wednesday that Saudi Arabia would be happy to see crude rise to USD 80 or even USD 100 a barrel, which indicated that Riyadh is not thinking about taking a step back on its decision to cut supply.

"The recent spike in crude prices is largely due to sudden spurt in geopolitical tensions in Middle East. Spike in oil prices above current levels can attract higher supply from US (Shell Oil). Considering this, oil prices are likely to be in the range of USD 60-70 in the medium term," said Vinod Nair, Head of Research at Geojit Financial Services.

Market participants are, in fact, worried that the commodity will continue appreciating to new highs, which would spell trouble for Indian markets.

One such participant is Atul Suri of Marathon Trends, who told CNBC-TV18 that crude is the biggest dark cloud for India as it is on a bullish trajectory. "No one saw crude at USD 70 per barrel when it was trading around USD 50-55. It would not be a surprise if crude hits USD 90 per barrel," he told the channel.

Detailed below are a couple of experts' opinions on rising crude oil prices and what investors should be mindful about.

Impact on Economy

Kotak Mutual Fund’s Shibani Kurian pointed out that higher crude prices could put pressure on macroeconomic indicators, particularly on balance of payments due to wider current account and fiscal deficits.

"By and large, it is estimated that a USD 10/bbl rise in crude oil prices on a sustained basis could impact annual CAD by 0.4 percent of GDP. Similarly, it is estimated that a USD 10/bbl rise in crude oil worsens the fiscal balance by 0.1 percent of GDP,” Kurian, Senior Vice President and Head of Equity Research, Kotak Mutual Fund, told Moneycontrol.

Vinod Nair of Geojit Financial Services shared similar thoughts on the subject.

"March CPI inflation has eased to 4.28 percent from 4.4 percent in February due to reduction in food prices. However, any further rise in oil price and  outlook on monsoon will adversely impact the trajectory…oil prices are likely to be in the range of USD 60-70 in the medium term,” he said.

Impact on OMCs

Kurian said she believes that an appreciating crude will also affect companies’ marketing EBITDA if the government takes away their freedom to revise prices.

"While one cannot rule this out completely, especially given the election calendar, so far the government has allowed OMCs the freedom to price. In fact, OMCs were able to maintain marketing margins last month when crude oil price was at USD 70/bbl," she said.

On the other hand, Nair believes OMCs would have to bear the brunt of rising prices this year.

"A four-year price high of USD 71/bbl may trigger a hike in inflation. But given the election period, oil marketing companies may have to absorb the hike in cost, which will impact their profitability," he said.

Trading range

Vivek Misra of Karvy Stock Broking pointed out that a recent report by the US Energy Information Administration estimates prices of Brent crude to average USD 63 in 2018 and 2019.

"Secondly we should note that US produced 10.4 million barrels of crude in a day, the highest level since 1970. The EIA also estimates that world crude oil demand will grow by 1.8 million barrels in 2018 as well as 2019. While there may be volatility in prices, oil prices should be largely well behaved," Misra, who is Head of Fundamental Research at the brokerage firm, said.

(With inputs from Reuters)