OMCs would suffer the most when Indian crude basket averages $87 a barrel and oil rises 6% due to the Israel-Hamas conflict

 OMCs would suffer the most when Indian crude basket averages $87 a barrel and oil rises 6% due to the Israel-Hamas conflict

With benchmark Brent marking its greatest weekly rise since February, oil prices increased by about 6% on Friday as investors factored in the likelihood that the Middle East conflict may worsen as a result of Israel's start of ground assaults within the Gaza Strip. A week after the terrorist Palestinian group's murderous assault in southern Israel, Israel announced a change from an air war to ground operations to ferret out Hamas militants

Chaos erupted when Israel ordered more than a million Palestinians to evacuate the northern half of the enclave within 24 hours while Islamist organization Hamas warned the locals not to flee, as some Gazans fled their homes on Friday to avoid an Israeli assault.

Market experts and commodities analysts believe that the crude oil market is still on high alert for any signs that the Israel-Hamas war may be about to spill over into the Middle East's oil-producing area.

According to Quincy Krosby, Chief Global Strategist for LPL Financial, based in Charlotte, North Carolina, US, "Reports regarding Iran's support for the Hamas attack have been denied by Iran but concern is focused on a broader Iran-Israeli conflict, which would, in turn, lead to a dramatic escalation of conflict in the region and a dramatic climb in oil prices."

Brent crude and MCX closing prices for the week:

Brent futures ended the day at $90.89 a barrel, up $4.89 or 5.7%. The price of a barrel of US West Texas Intermediate (WTI) oil increased by $4.78, or 5.8%, to $87.69. The daily percentage advances for both benchmarks were the largest since April. Additionally, Brent saw a weekly gain of 7.5%, the most since February. For the week, WTI increased 5.9%, according to news source Reuters.

In your country, crude oil futures with an expiration date of October 19 finished 5.45% higher at $7,272 per barrel on the Multi Commodity Exchange (MCX), having fluctuated between $6,962 and $7,278 per barrel throughout the session. This compares to the previous close of $6,896 per barrel.

What influences the price of crude oil?Since Israel is not a major producer, the Middle East war has not had much of an influence on the world's oil and gas supply so far. However, investors and market watchers are analyzing how it can escalate and what it would imply for supply from neighboring nations in the area with the highest oil production in the world.

In order to plug gaps in the system intended to penalize Russia for its invasion of Ukraine, the US administration decided to impose the first penalties on owners of tankers transporting Russian oil priced over the G7 price threshold of $60 a barrel. This move helped to raise prices. The increased US monitoring of Russia's exports, which is the second-largest producer of oil in the world and a significant exporter, may reduce the supply.

-The Organization of the Petroleum Exporting Countries, more commonly known as OPEC kept its forecast for the growth in the worldwide demand for oil at 2.25 million barrels per day (bpd) in 2024, in contrast to an increase of 2.44 million bpd in 2023, citing signs that indicate a resilient global economy so far this year as well as further demand gains in China, the world's largest oil importer.

-The International Energy Agency (IEA) cut its estimate of the rise of oil demand for 2024, indicating that the poor state of the world economy and advancements in energy efficiency would have an impact on consumption. In contrast to its earlier prediction of 1 million bpd, the EIA now anticipates a demand increase of 880,000 bpd by 2024. 

How will the Indian crude basket be affected by increasing global oil prices?

India, a net importer of crude oil that depends on imports for up to 85% of its energy requirements, may face higher import costs if global crude oil prices continue to rise throughout the year.

India is presently the third-largest crude oil consumer in the world, and CareEdge Ratings predicts that even in the face of volatile crude oil prices, import volumes will continue to rise in the next years.

In the fiscal years 2023–2024, it was predicted that the average price of Indian basket crude oil would be $9.767 per barrel. Although the price of Indian basket crude oil has varied this fiscal year, estimations from trading companies indicate that this amount is much more than the average price of $78.19 in the prior year.

The impact on oil marketing companies (OMCs), such as Indian Oil, Bharat Petroleum Corp Ltd (BPCL), and Hindustan Petroleum Corp Ltd (HPCL), would be higher average Indian crude basket prices and lower gross refinery profits.

 According to economists, there would be pressure on OMCs to hold the line on raising retail gasoline or diesel prices if the higher global oil price were to trickle down to the retail market and exacerbate local inflationary pressures.

"As the pre-election period draws near, we expect OMCs to absorb a sizable chunk of the increased global petroleum prices. By lowering various levies and taxes on retail gasoline prices, the government may also think about partly sharing this cost with OMCs, according to CareEdge Ratings.

However, since their balance sheets have mostly been rebuilt as a result of higher earnings in the current fiscal, the central government may compel OMCs to lower the price of gasoline and diesel. Notably, local brokerage company JM Financials anticipates a government price decrease on gasoline and diesel around Diwali in 2023 due to the start of state elections in November or December.

Impact on CAD: According to the most recent estimates by market experts, rising oil prices have an effect on India's current account deficit (CAD), which quantifies the difference between exports and imports of goods and services.

A country's CAD is a crucial measure of its balance of payments, and given the present trajectory of oil prices and the momentum they have gained, every $10 increase in Brent futures has the potential to expand the CAD by 0.5%.

Rising crude prices benefit oil exporters while hurting oil-importing nations like India. India's current account deficit worsens by 0.5% for every $10 increase in Brent petroleum prices. Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said that as a result, the INR depreciates and imported inflation results.

In the first five months of FY24, the average price of the Indian crude oil basket was $80.1 per barrel. However, in the first week of September, the price of the Indian crude basket reached $90.7 a barrel. 

According to CareEdge Ratings, the average price of Indian crude oil for the whole fiscal year might be between $86 and $87 per barrel if Brent crude prices continue high at this level.

The full-year current account deficit is anticipated to widen by around 20 basis points (bps), assuming India buys 5 million bpd of oil. Therefore, assuming Indian crude basket averages around $90 per barrel for the balance of the year, CAD may rise to 1.8% of GDP.

General Oil Majors This month, Saudi Arabia and Russia made the announcement that they will maintain the year-end oil supply cuts of more than 1 million bpd. Prices have reached a 10-month high as a result of the production cutbacks, which were initially announced by the two OPEC presidents in July, and the global economy is now facing new inflationary pressures.

Oil has an especially large effect on global financial markets due to its important position in the world economy, its interconnectedness with many different industries, and its potential to influence general financial markets as well as investor sentiment,'' said Nigel Green, CEO, deVere the company, a privately held fintech company.

Today, around 30% of the world's crude oil is produced by OPEC countries. Saudi Arabia produces more than 10 million barrels of oil per day, making it the cartel's biggest oil producer. Around 40% of the world's petroleum is produced by OPEC+, and its political actions may have a significant effect on oil prices.