Rise in Oil Prices could Further Damage Sentiments, says CLSA
Cuts price targets on OMCs, says consumer staples and paint cos may feel the heat, too
Mumbai: The rise in oil prices is increasingly becoming a matter of concern for investors. Hong Kongheadquartered brokerage CLSA on Thursday said that a further rise in oil prices could damage investor sentiments and raise the twin deficit fears.
Brent crude oil futures crossed $74 per barrel on Thursday, the highest level since late-2014. India imports 80% of its total oil requirements.
“Oil is now firmly above $70 and there’s talk of it moving to $80. This could further damage investor sentiments, as the economy doesn’t have a lot of cushion, especially in a pre-election year,” said CLSA in a note.
As the current year is a pre-election year, a rise in oil prices to $80 per barrel could prompt the government to maintain petrol and diesel prices at current level and there could be a cut of ₹4 per litre in fuel excise duties, implying an impact of ₹50,000 crore on tax revenue, said CLSA. The firm added that the government’s petroleum subsidy for the current financial year could be higher by ₹30,000 crore than budgeted if oil were to average $80 per barrel.
Finance Minister Arun Jaitley had allocated ₹24,933 crore for petroleum subsidy in the Union Budget for 2018-19. The subsidy allocation is a 2% increase over the revised estimate of ₹24,460 crore for last financial year.
CLSA on Oil Price Surge
“Overall, we estimate that crude at $80/bbl can have an impact of as much as ₹750-850 billion (₹75,000 crore-₹85,000 crore) (40-50bp of GDP) if the government takes the entire hit from hereon. The revenue shortfall risk from weaker GST collections is 30-40bp (basis points) and therefore the cumulative fiscal impact would be 70-80bp,” said CLSA.
CLSA said the twin deficit issues could re-emerge with current account deficit moving up to 3% of the gross domestic product and fiscal risks to the tune of 40-50 basis points of GDP. The weak US dollar and strong RBI reserves would limit the currency impact, but the era of rock-like stable rupee may be behind us, the firm said.
In terms of sector impact, oil marketing companies could be at risk if the government passes on some subsidy burden to them. In a separate report on Thursday, CLSA cut target price on the three oil marketing companies — Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation — by 17-20% citing macro concerns. These oil retailers hit 52-week lows in Thursday’s trade.
CLSA said rising oil is also a negative for users of oil-based chemicals industry including consumer staples and paints. The brokerage added that a potential weakening of the rupee will be positive for exporters.