‘Lower oil prices to benefit economy’

The present run of lower oil prices will bring significant benefits for the Indian economy as reduced import bill and lower current account deficit and inflation could have a positive impact on GDP growth, Kotak Institutional Equities Securities has said in its report on the oil sector.•Also, a large number of sectors and companies (with the exception of upstream oil companies) will also benefit significantly from higher demand and profitability, despite the current weak demand conditions, the firm has said.

Oil prices fell almost 30% on March 9 after the failure of OPEC and Russia to agree on extension of production cuts required to stabilise oil prices affected by the demand slump.While, there is mayhem in the oil market after Saudi Arabia announced that it would increase oil production in an already over supplied market, the developments over the past few days have brought several positives for India.

Kotak Institutional Equities has said that the turmoil enhances the possibility of benign crude oil prices in the near term. “Lower oil prices provide significant tailwinds to the Indian economy in the form of lower current account deficit (50 bps of GDP or $15 billion for every $10/bbl decline in crude prices); lower inflation (30 bps for every $10/bbl fall) and improved government finances/household savings,” the brokerage firm has said.

For the markets, lower oil prices may largely be positive as companies accounting for 18 per cent of Nifty-50 Index would tend to gain from the developments. These may specifically be companies in sectors such as automobiles, aviation, cement, consumer companies, CGD companies, oil marketing companies and paints.

For the country’s energy sector companies, lower oil prices would be a mixed bag. Kotak said that upstream oil and gas companies such as OIL and ONGC may make losses if net realised price is below $35/bbl, while EPS of GAIL will fall by Rs 0.9 for a $10/bbl decline in crude oil prices.

Weak global demand conditions may also keep refining margins low, but high marketing margins are likely to offset this weakness. But the development may result in one-time inventory loss for refiners in the fourth quarter of FY20, as Rs 0.5/litre increase in marketing margins increases EPS of OMCs by 20-30 per cent.