Crude Oil Prices Hit 33-Month Low: Here Are Upstream, OMCs, Paint & Other Stocks To Pick; Check List

Crude oil prices have experienced a significant fall, declining 26% from their 52-week highs of $98 per barrel to hover around the $72 mark for Brent Crude, while US West Texas Intermediate (WTI) has slipped below $70 per barrel. This downtrend is expected to benefit various sectors in India, especially Oil Marketing Companies (OMCs), along with paint and tyre manufacturers. The sustained drop in oil prices could result in a golden opportunity for these industries to improve their profit margins and reduce operational costs.

India's state-run oil companies are already enjoying substantial gains from the earlier rise in crude prices, but the recent decline offers further upside potential. For the OMCs, lower crude prices translate into higher refining margins, boosting profitability. State-owned Hindustan Petroleum Corporation Limited (HPCL) has been a stellar performer, delivering 245% return over the last year. Other state-run entities like Oil India (240%), Chennai Petroleum (76%), and ONGC (63%) have also delivered gains.

Bharat Petroleum Corporation Limited (BPCL) and Indian Oil Corporation (IOC) followed suit, delivering returns of 99% and 84%, respectively, over the same period. With crude oil prices showing no signs of recovering in the near term, OMCs are positioned to see sustained benefits, which could potentially extend their already strong rally.

The falling price of crude oil is not just a blessing for OMCs but also for industries that rely on crude oil-derived products, such as paint and tyre manufacturers. Crude oil is a crucial input for these industries, with lower prices translating into reduced raw material costs, which improves profitability and supports stock price performance.

In the paint sector, Asian Paints and Berger Paints have remained relatively flat over the past year, while Kansai Nerolac has seen a 9% drop in share value. However, this downtrend in crude prices presents an opportunity for these companies to reverse their underperformance. Master Capital, a financial services company, noted that the decline in crude oil prices could reduce costs for paint companies, helping them sustain profits in the coming quarters.

Similarly, tyre companies such as Balkrishna Industries, Ceat, Apollo Tyres, and JK Tyre & Industries have seen stock gains ranging from 22% to 62% in the past year. The decline in crude oil prices will ease their raw material costs, giving them a further boost as they continue to build on their positive stock performance.

Crude oil prices collapsed amid renewed fears of weaker demand, driven by weak economic data from both the US and China. These concerns have intensified as traders worry about an oversupply in the oil market. China, one of the world's largest oil consumers, has shown a decreasing appetite for crude oil, with imports rebounding slightly from July but remaining down 7% year-on-year at 49.1 million tonnes. The fall in demand is also attributable to the rising adoption of electric vehicles in China, further dampening crude oil consumption.

Additionally, unattractive margins have kept the utilization rates low at smaller Chinese refineries, exacerbating the decline in demand. The speculative selling triggered by these concerns has deepened the selloff in crude oil, causing Brent crude to drop below $70 per barrel for the first time in over two years.

The sharp decline in crude oil prices occurred despite OPEC's recent decision to delay its planned production hikes by two months, stated a Motilal Oswal report. OPEC remains optimistic about demand holding up, but it trimmed its forecast for global demand growth in 2024 to 2.03 million barrels per day (bpd) from 2.11 million bpd, citing weaker-than-expected demand from China. The cartel's forecast for 2025 remains steady at 1.74 million bpd. In its latest market report, OPEC raised its global economic growth forecast from 2.9% to 3.0%, supported by strong consumer spending, but noted a decline in total crude oil output by 197,000 bpd in August, bringing total production to 26.59 million bpd. However, certain producers like Iraq and Kazakhstan have continued to produce above their agreed quotas, further complicating OPEC's production balancing act.

The decline in crude oil prices comes amid economic concerns in major global economies, particularly the United States and China. Weak economic data from both countries has fueled fears of reduced demand for oil, leading to an oversupply situation in the global market. China's appetite for oil, in particular, has weakened, with its crude oil imports rebounding slightly in July but remaining down 7% year-on-year to 49.1 million tonnes.

Domestically, however, India's oil demand has remained robust, with July 2024 seeing a 7.2% year-on-year increase in total petroleum product consumption. For the first four months of FY25, total petroleum product consumption stood at 40.6 million metric tonnes (mmt), up 3% year-on-year. Diesel consumption rose by 2.1% to 31.5 mmt, while petrol consumption jumped by 7.8% to 6.7 mmt. Notably, aviation turbine fuel (ATF) saw a sharp increase of 11.9% to 1.5 mmt, reflecting a recovery in travel demand. Liquefied Petroleum Gas (LPG) consumption also grew by 5.6% to 4.75 mmt.

While the decline in crude oil prices is a positive development for Indian equities, the duration and cause of the fall will be critical in determining its overall impact. US brokerage firm Morgan Stanley has expressed caution, noting that if the decline in crude oil prices is driven by a global economic slowdown, the positive effects on India's economy may be diluted. Slowing demand in the US and China, the two largest oil consumers, could indicate broader economic concerns, which may eventually weigh on India's growth outlook.

Morgan Stanley's strategists stated that the recent bearish sentiment in the oil markets is primarily due to concerns about slowing global demand. While this may lead to a temporary improvement in India's trade balance, the longer-term effects on Indian equities would depend on the global economy's trajectory.

OPEC (Organization of the Petroleum Exporting Countries) recently revised its global oil demand forecast for 2024, lowering it to 2.03 million barrels per day (bpd) from its previous estimate of 2.11 million bpd. The revision was largely influenced by weaker-than-expected demand in China, which has seen an increased adoption of electric vehicles and cleaner energy sources like LNG trucks. China's 2024 oil demand forecast was trimmed to 6,50,000 bpd, down from 7,00,000 bpd previously.

Despite these challenges, OPEC has taken a cautious approach to managing the global oil supply. The cartel delayed its planned production hikes by two months following the sharp sell-off in oil prices. OPEC's efforts to maintain market stability could help prevent a further slide in prices, but the market remains volatile amid ongoing concerns about global economic headwinds.

Kedia Advisory, a financial advisory firm, also noted that the shift toward greener fuels, coupled with economic struggles in China's real estate sector, is creating additional uncertainty for global oil demand. However, with Brent crude prices now trading below $71 per barrel-levels not seen since March 2023-the oil market continues to face pressure from a supply-demand imbalance.

For investors, the current decline in crude oil prices presents a mixed bag of opportunities and risks. OMCs, along with paint and tyre companies, stand to benefit significantly from the reduced cost pressures, making their stocks attractive in the near term. However, global economic concerns, particularly in the US and China, could dampen the overall impact of lower oil prices on the Indian economy.