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Crude oil surges to 13 months high

Rising crude oil prices could lead to higher inflation and also impact the profitability of many companies in India. This could, thus, indirectly impact their stocks.

What’s the news?

Crude oil price crossed $60 per barrel

What does that mean?

International crude oil prices have surged to their highest levels in 13 months on the back of oil-producing countries maintaining production cuts. Another reason for the rise in prices is attributed to expectations of improvements in global demand as the Covid-19 vaccine is rolled out across the world. Brent crude stood at $62.83 per barrel as on Mar 2021 compared to $35 per barrel in Oct 2020. Within six months crude price has doubled.

The rise in the price of crude will lead to an increase in India’s import bill and current account deficit (CAD). India imports 80 per cent of its crude oil requirements.

The upward move in crude prices will also put upward pressure on petrol and diesel prices across the country which are already at all-time highs due to the recent rally in international crude prices as well as high central and state levies.

An increase in the price of crude oil means an increase in the cost of producing goods. This price rise would finally be passed on to consumers resulting in inflation.

Another impact of rising crude oil price is that it impacts the profitability of companies due to higher input cost. India’s top 500 companies fuel cost to total sales ratio stood at 4.6% as per FY21 data. If crude price rises then the aforementioned ratio will increase and it adversely impacts the operating margin of the company.

How does this affect your wealth?

Most Indian companies depend on a healthy crude oil price. A rise in crude oil price will impact the profitability of the companies due to high operational cost. This could negatively impact the stock prices of such companies.

 

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