As crude oil nears $140, here’s how it is impacting key sectors

Crude oil prices have been on the boil ever since Russia invaded neighbour Ukraine, in a conflict that is eerily reminiscent of how the second world war began more than eight decades ago. 

Oil prices have soared to the highest level since 2008 after the US said it was discussing a potential embargo on Russian supplies with its allies.

Brent crude—the global oil benchmark—spiked to above $139 a barrel, before easing to around $130.

Energy markets have been rocked in recent days over supply fears triggered by the Russian invasion of Ukraine. Consumers are already feeling the impact of higher energy costs as fuel prices and household bills jump.

And as the prices keep itching upwards, significantly beyond the psychologically important $100 per barrel mark, Indian companies say they are beginning to bite. 

How have international prices risen in the wake of the Russian invasion of Ukraine?

Before the conflict between Russia and Ukraine began, oil prices were around $90 a barrel. The rates are now trading near $130 a barrel and some analysts even fear prices could reach $180 a barrel in a few days. 

India imports nearly 80% of its crude oil requirements. And crude oil is India’s single-biggest import item. This means India’s import bill will rise sharply in coming weeks and months, widening the trade deficit and putting further pressure on the balance of payments especially since the rupee has also slumped to all-time lows against the dollar.

Are oil marketing companies likely to raise retail prices soon?

Yes, a fuel price rise could be imminent, as elections to key state assemblies of Uttar Pradesh, Punjab, Uttarakhand, Goa and Manipur draw to a close Monday evening. Government-owned oil marketing companies Indian Oil, Hindustan Petroleum and Bharat Petroleum are likely to raise oil prices at the pump as soon as tonight or tomorrow, to offset inventory losses and pass on the price increases to consumers. 

While this will augur well for their stock prices, it will have a significant inflationary impact on the Indian economy and will effectively reduce the purchasing power of the average consumer with limited budgets. 

How is it affecting freight costs, coal prices?

Citing Jindal Steel and Power Ltd managing director V R Sharma, news reports say that companies like the steelmaker want governments across the world the impose some form of controls on energy prices all over the world, as higher prices are making raw materials costlier for the steel and manufacturing sectors. 

“It is a very unfortunate situation. Some oil companies are taking advantage of the situation... Respective governments across the world can keep a price control as everything is run by energy,” a Press Trust of India news report cited Sharma as saying. 

In a double whammy of sorts, rising fuel costs are also pushing up freight rates, causing commodity prices to rise even further. A lot of raw materials including iron ore and coal, which go into steel manufacturing, are imported. This crude price rise is having a cascading impact on commodity prices. 

As oil prices have gone up, freight rates of cargo ships, which currently stand around $20,000 a day, are likely to reach $30,000 per day.

Similarly, coal prices are also rising. Coking coal—used in steel manufacturing—has breached the $550-a-tonne mark, from $250 a tonne before the crisis began. India meets 85% of its coking coal requirement from imports.

“Iron ore has also moved up. NMDC (the country's largest iron ore producer) has increased the prices twice...current price is Rs 10,000 a tonne lump. Because of it, sponge iron and pig iron are also high. Energy prices are main reason behind all this," Sharma said. 

So, are steelmakers hiking prices?

According to industry sources, domestic steel makers have already hiked the prices of hot-rolled coil (HRC) and TMT bars by up to Rs 5,000 per tonne as supply chain is being impacted amid the ongoing Russia-Ukraine conflict.

According to them, the prices have been increased in the past few days and are expected to go up further in the coming weeks with the crisis deepening between the two countries.

After the price revision, a tonne of HRC will cost around Rs 66,000, while the buyers will get TMT bars for about Rs 65,000 per tonne. HRC and TMT bars are used in industries such as auto, appliances, construction, and real estate. This means everything from cars to houses will get costlier.

What about FMCG companies?

They, too, are having to hike prices to offset rising input costs. In particular, prices of cooking oil could rise further as Ukraine and Russia account for 80% of global sunflower oil supply.

In fact, stocks of nearly all FMCG majors including Hindustan Unilever, Dabur, Colgate Palmolive India and Nestle India, to name just a few, have been on the decline over the last few days. The sector as a whole is underperforming the benchmark index, which itself has been declining for four straight weeks on the trot.