Friday, October 23, 2009

Oil on the boil again: Impact on sectors

Crude prices are once again on an upward spiral leading to fears about the impact on the margins of companies in various sectors. Analysts  tracking markets say any further increase could lead to inflation rising at a faster pace. As a consequence, stocks in sectors like fertiliser, textiles, pharma, automobile, tyre, paints and aviation could be affected if the surge continues.

However, the strong rupee will act as a countervailing force which may ensure that their cost of raw material does not spin out of control. But should crude go beyond $100 a barrel from the levels of $80/barrel, there could then be some real cause for concern, feel analysts.

“Crude oil prices have more than doubled from their 52-week low levels. If the price of crude oil continues to increase and if the government decides to pass on the additional cost to consumers, it is expected to lead to an increase in inflation at a much faster pace compared to the anticipated level of 6% by March 2010. In an otherwise scenario, if the price increase is not passed on and the government bears the hike in the price of crude oil, then the fiscal deficit situation is expected to worsen further from the budgeted 6.8%. If the fiscal deficit figure, which is closely monitored by investors, rises beyond an extent then it can negatively impact the broader markets,” says Vishal Jajoo, research analyst of FCH Centrum Wealth Manager.

Oil prices have tumbled from the historic highs of more than $147 per barrel in July 2008 to about $32 per barrel in December because of the global recession, but have since risen on hopes of recovery. While the prices have still not gone to dangerous levels, they are not very far from it, say analysts. “While so far the direct impact has been limited, if prices retain this momentum, it could adversely impact companies’ profitability. The market is in a wait-and-watch mode,” said an analyst with a domestic brokerage.

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