Markets underpricing oil shock risk, crude can hit $150/bbl: Analysts

Retail fuel price hike is unavoidable with crude above $110/bbl, suggest analysts at Elara Capital. At $125 crude, even after the excise cut, the retail price needs to rise by Rs 8-14/liter, they add.

Markets are underpricing oil price shock risk, suggest analysts, who see crude (Brent) hitting the $150 mark in case the West Asia war prolongs even for a couple of months from now and damages critical oil & gas infrastructure in the Gulf region.

 

“Options markets are actively pricing scenarios of $150 oil, and up to 20 per cent of global supply has been disrupted through the Strait of Hormuz. We’re looking at a potential loss of 10 to 14 million barrels per day (bpd) if disruption persists in a market where global demand sits just above 100 million barrels. That gap cannot be easily filled,” said Nigel Green, chief executive officer (CEO) of deVere Group, a global consulting firm that has $14 billion assets under management.

 

 

  Brent crude oil prices surged over 3 per cent on Monday to $116/bbl, and have surged nearly 53 per cent since the conflict in West Asia started.

 

Analysts suggest the recent price spike has been faster than seen during previous major geopolitical crises, including the Iraq War and the Ukraine conflict. At the same time, political signaling is amplifying uncertainty, they added.

 

“Energy markets are no longer being driven purely by supply and demand. Political intent is now a central variable. Comments about seizing assets, restricting flows, or controlling transit routes have immediate pricing implications. Financial markets are beginning to react, but not fully,” Green added. 

 

India impact

 

For India, a retail fuel price hike is unavoidable with crude above $110/bbl, suggest analysts at Elara Capital. At $125 crude, even after the excise cut, the retail price needs to rise by around Rs 8-14/liter, they said.

 

“At $150, required rise spike to Rs 26-30/liter. At that point, inflation shock would become visible and politically sensitive (seen in CY11-13),” wrote Gagan Dixit, Amogh Deshpande and Kartik Bhandari of Elara Capital in a recent note. 

 

Liquefied petroleum gas (LPG) is the bigger fiscal pain, they said, as $1/bbl crude rise increased LPG loss by around Rs 1/kg, adding nearly Rs 33 billion to the subsidy bill. “At $100/125/150 crude, LPG under-recovery could reach around Rs 1.4/2.2/3 trillion,” the Elara report said.

 

Jyotivardhan Jaipuria, founder & managing director at Valentis Advisors, also believes that the markets are not fully pricing in the impact the ongoing West Asia war will have on crude oil prices. A lot, he said, will depend on how long the war prolongs and the damage to the oil & gas infrastructure in West Asia.

 

“A spike to $150/bbl levels is possible, but prices may cool off if the war clouds abate and the Strait of Hormuz opens. However, if the war prolongs and critical oil & gas infrastructure is damaged, it may keep crude prices elevated for a long time, which the markets are not factoring in right now. Crude at $150 levels can then be a possibility, which can see Sensex, Nifty fall 10 – 15 per cent from the current levels,” he said. 

 

Analysts at Macquarie expect crude to hit $200/bbl if the conflict drags on till June, with the Strait of Hormuz staying shut. “The timing of the re-opening of the straits, and physical damage to energy infrastructure, is the main determinant of the longer-term impact on commodities,” they said in a recent note. READ ABOUT IT HERE

 

G Chokkalingam, founder and head of research at Equinomics Research sees the Sensex and Nifty fall another 10 – 15 per cent if the war prolongs and there is a sustained rise in crude oil prices.

 

“$150/bbl (Brent) is possible if the war escalates/prolongs. At these levels, there will be some demand destruction as well, which can keep prices in check,” he said.