Rising global energy prices likely to turn the heat on Indian markets

Many will bear the brunt, except crude & gas producers and renewable firms

One of the consequences of increasing activity in the global economy is the rising demand for energy. The Indian crude basket has risen in price from $54 a barrel in January to $65 in May. We have also seen the impact at the retail level as prices at the pump have risen. Side by side, the price of gas has also gone, resulting in the increased cost of cooking gas cylinders, etc.

In a note to clients, investment bank Goldman Sachs projected global oil demand would see the biggest jump ever over the next six months. Higher demand for travel and acceleration of vaccinations in Europe would mean “the biggest jump in oil demand ever, a 5.2 million barrel per day (bpd) rise over the next six months.”

The impact on India would be negative in most respects. First of all, roughly 80 per cent of India’s oil and 30 per cent of gas are imported. Higher global prices put pressure on the trade balance by inflating imports. Second, there is an inflationary impact across the economy as energy and transport costs rise. The chemical industry is directly affected by higher input costs — petrochemicals are critical feedstock for fertilisers, paints, textiles, and other industries. In addition, the refining sector suffers from falling margins as feedstock price rises.

Two industries gain. One is the primary producer of crude and gas. The other one is usually the renewables industry. As fossil fuel prices rise, wind and solar become increasingly competitive and tend to receive more investor interest.

Right now, the demand for energy in India is low, which means that the rising value of petro imports will also not be unmanageable. However, as and when the economy recovers and energy demand rises, this can be a problem. India also has high reserves of nearly $600 billion, which means it can withstand an adverse trade balance. The other point of concern on the external front is that foreign portfolio investors (or FPIs) have been net sellers for two months. If this trend continues indefinitely, there may be pressure on the rupee.

There are just three primary producers in India -- Vedanta, ONGC and OIL. They can all be gainers if there is a sustained bull run in crude and gas. But PSUs may not be allowed to realise the entire potential profit and may be asked to subsidise downstream PSU refiner-marketers.

ONGC-HPCL in theory is an end-to-end energy conglomerate but with separate balance sheets. The strategic sale of BPCL can be held up due to lower valuation. The PSU refiner-marketers can see margins badly affected if oil does rise to $80. Reliance Industries still derives the major share of its revenues from the petrochem division and it will see falling margins.