Crude oil rally & sector-wise impact: Past oil shocks suggest it may be time for stock rotation

Axis Securities on Monday said crude oil cycles often create sector rotation opportunities, making portfolio positioning critical. It cited past oil shocks, including the global financial crisis (GFC) that sent crude to a record $147 level in 2008, the 2013 Brent move past $100, and the Russia-Ukraine energy shock of 2022, when crude touched $120, to suggest markets often see sector rotation rather than a broad collapse.

Crude oil prices soared a solid 28.8 per cent to hit a high of $119.46 per barrel today, sending shivers down stock investors' spine. The fall came as Kuwait and Iraq started reducing oil output amid fears of prolonged disruption to shipping via the Strait of Hormuz. The NSE benchmark Nifty was down 2.4 per cent to trade below 23,900 level. The BSE barometer Sensex fell about 1,800 points and was quoting at 77,141.75.

Historically, said Axis Securities, periods of sharp crude oil price increases have triggered inflation spikes, rupee depreciation, and pressure on oil-dependent sectors, while benefiting upstream energy companies.

Boiling crude impact on economy

India is the third-largest oil importer globally, and energy imports constitute a large part of the country's trade bill.

"Every $10 rise in oil prices may widen India’s current account deficit by 0.35–0.5 per cent of GDP. A 10 per cent increase in crude oil prices can raise inflation by about 20 basis points. These macro linkages make crude oil one of the most closely watched global variables for Indian investors," Axis Securities said.

Crude oil is purchased in dollars, which increases dollar demand when oil prices rise. Higher dollar demand from refiners and put pressure on foreign exchange reserves and in turn rupee. Recent episodes have shown the rupee weakening during oil spikes due to rising import bills and trade deficits, Axis Securities said.

Sector-wise impact

For aviation sector, ATF fuel accounts for 30–40 per cent of airline operating costs. A rise in crude oil prices thus lead to margin pressure, ticket price hikes and demand slowdown.

Paint companies use petroleum derivatives as raw materials. A rise in crude oil prices raise input cost inflation and result in margin compression.

Axis Securities said many chemical products are crude derivatives. Higher raw material costs leads to profitability decline. Similar is the case with tyres where rubber chemicals and petroleum derivatives drive tyre production. 

In the case of logistics and transportation, diesel prices drive logistics cost structures.

Cement companies rely heavily on pet coke and fuel energy. For OMCs such as BPCL, HPCL and IOC, the impact depends on government pricing policies. If retail prices stay capped, margin pressure is all likely. Upstream oil companies is one pocket that benefits. Higher crude prices increase realisation per barrel for ONCG and Oil India Ltd, boosting profitability. Meanwhile, some complex refiners benefit from higher refining margins during volatility.

Oil shocks: How govt reponds 

After the 2008 shock, inflation in India surged above 9 per cent. Fiscal deficit widened while equity markets corrected sharply. Fuel subsidies increased significantly. Government responded with subsidy support to oil companies, price controls and monetary tightening. 

In 2013, rupee depreciated sharply, current account deficit widened and the RBI implemented currency stabilisation measures. The government imposed import restrictions on gold, initiated on fiscal consolidation path. Monetary tightening was also observed. In Russia-Ukraine case also, energy costs surged. The government reduced excise duty on fuel, increased imports of discounted Russian oil and diversified energy sources.