Asian Paints, IOC, Apollo Tyres, HPCL, IndiGo & BPCL shares fall up 4% as crude oil price spikes amid Iran-Israel conflict

Indian stock markets opened on a weaker note on Friday on the back of rising geopolitical tensions between Iran and Israel. The latest round of geopolitical heat has led to another boil in crude oil prices, which has burnt the hands of investors of oil marketing, aviation, tyre and paint companies.

Crude oil jumped after reports of a sharp escalation in Middle East hostilities. Oil prices jumped $3 a barrel on Friday in reaction to reports that Israeli missiles had struck a site in Iran, sparking concerns that Middle East oil supply could be disrupted. rent futures were up $2.63, or 3 per cent, to $89.74 a barrel.

A surge in crude oil prices triggered by war fears in the Middle East presents a mixed bag for oil-related companies. While these companies, encompassing sectors like tyres, paints, oil marketing companies (OMCs), and aviation, experience higher input costs due to rising crude oil, said Sonam Srivastava, Founder and Fund Manager at Wright Research.

"The future trajectory of oil prices remains uncertain. Current geopolitical tensions suggest potential for further increases. The US Energy Information Administration, as of April 19, 2024, forecasts an average Brent crude oil spot price of $90 per barrel for the second quarter, reflecting supply constraints and ongoing geopolitical risks," she said.

Crude oil prices have seen a significant rise in the last few days due to geopolitical reasons, as the fresh headlines of tensions has raised concerns on supply side, as we know Iran is the third-largest producer of crude oil within OPEC and India is the third-largest consumer and importer of crude oil, said Prashanth Tapse, Research Analyst at Mehta Equities.

"However, sectors which are crude dependent as their raw material might be impacted negatively in sectors like Tyres, Cement, Aviation, Paints and OMC. Higher crude prices would squeeze out margins of these sectors.  Overall the near term outlook remains subdued," he said.

Shares of Bharat Petroleum tanked more than 4.34 per cent to Rs 564.15, while Indian Oil Corporation and Hindustan Petroleum tumbled about 4 per cent each to Rs 162.25 and Rs 457.85, respectively. Reliance Industries was down more than a per cent to Rs 2895. Other stocks including Mangalore Refinery and Chennai Petroleum tumbled 3.3 per cent each.

Crude prices had spiked on concerns of wider geopolitical tensions but has corrected a bit to $89/bbl. While near term spike in crude prices will impact OMCs stock performance but likely move to daily retail price changes post general elections will keep stock prices from sharp correction, said Avishek Datta, Research Analyst, Anand Rathi Institutional Equities.

"We maintain our Buy rating for BPCL and HPCL and maintain Hold rating on IOCL," said Datta from Anand Rathi.

Among the tyre companies, TVS Srichakra tanked more than 6 per cent to Rs 4008.65, whereas Balkrishna Industries tumbled about 3 per cent to Rs 2266.35. Other tyre companies including CEAT, Apollo Tyres, Goodyear India and JK Tyres dropped more than 2 per cent each in the early session.

InterGlobe Aviation, which operates budget carrier IndiGo, dropped more than 4 per cent to Rs 3589.80 during the early trading session on Monday. SpiceJet was also down on the similar line, while defunct Jet Airways shed 3 per cent. Higher crude oil prices push the operational expenses for the airline companies higher.

In the Paint category stocks, Berger Paints India was down 3 per cent to Rs 501, while Kamdhenu Ventures, Indigo Paints, Sirca Paints and Asian Paints dropped 2 per cent each. Other paint stocks including Akzo Nobel, Kansai Nerolac and Shalimar Paints were also trading in the red.

Tyre and paint companies will face rising input costs from elevated crude prices, impacting margins unless they can pass on the increase. Oil marketing firms may benefit from better refining margins but struggle on the marketing side due to political pressures. Airlines will be severely impacted by costlier aviation turbine fuel, offsetting any demand upside, said Atul Parakh, CEO at Bigul

"Overall, user industries like tyres, paints, and aviation relying heavily on crude derivatives will likely see profitability dented. OMCs could see a mixed impact - refining up, but marketing earnings subdued if they can't raise prices freely. Companies with pricing power could fare relatively better," he said.

Echoing the similar views, Tarun Singh, MD at Highbrow Securities said that the oil sector's stock prices are speculated to exhibit subdued reactions due to major political events, including ongoing electoral processes both domestically and in the United States in the short-term.

"The uncertainty these elections bring is likely to prompt market participants to adopt a more cautious stance, potentially reducing the stocks' usual volatility. These sectors could face shrinking profit margins and rising operational expenses, leading investors to adjust their expectations regarding the companies' long-term profitability in light of these increased costs," he said.