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OMC, paint stocks in focus as crude rises to 4-month high

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Oil prices have been on the rise in recent times due to tighter supply, as projected by the International Energy Agency in its recent outlook, and rising geopolitical risks. Geopolitical risks remain elevated, with a stepped-up campaign of Ukrainian drone strikes on Russian oil refineries. Ukraine has been striking Russian oil refineries in heavy drone attacks, causing a fire at Rosneft's Ryazan refinery and the opening of a new tab for the largest refinery in Russia. The operation was put on hold as the attack happened but was resumed thereafter. Strikes on oil refineries, a key source of Russia's income, have the potential to reduce the country's output of gasoline and diesel and push up prices. Russia's energy ministry said Russia's seaborne fuel exports fell 1.5% from the previous month in February due to refinery downtime stemming from Ukrainian drone attacks and fires.

A bullish demand report from the International Energy Agency has given push to higher oil prices. The International Energy Agency predicted a tighter market in 2024 and raised its view on oil demand growth this year. The IEA raised its view on 2024 oil demand growth for the fourth time since November as Houthi attacks disrupted Red Sea shipping. Demand is forecast to rise by 1.3 million barrels per day in 2024, up 110,000 barrels per day from last month but still lower than the growth of 2.3 million barrels per day last year. The IEA also cut its 2024 supply forecast and now expects oil supply to rise by 800,000 barrels per day to 102.9 million barrels per day this year.

Higher oil prices are vulnerable for all the economies that are highly reliant on them. Higher crude not only affects inflation but also affects the operating margins of companies dealing with petroleum products. So, oil marketing companies (OMCs) and paint stocks are experiencing a decline due to increased input costs, impacting profit margins.

An investment bank like Morgan Stanley has raised its Brent oil price forecasts by $10 to $90 for the third quarter of 2024 due to these Russian outages and extended OPEC+ output cuts. Likewise, the outlook for oil marketing companies has been reduced because of the unease of passing on costs to consumers seeing the upcoming Lok Sabha elections. Rising prices may strain OMCs like IOC, BPCL, and HPCL as they face higher costs in sourcing crude for refining into petrol and diesel. As crude prices surge, OMCs may find it challenging to fully pass on the cost hikes to consumers due to government regulations or market competition.

Paint manufacturing companies uses a significant amount of petroleum-based as raw materials, so with rising oil prices they are expected to experience higher input costs. The price of crude oil is proportionally related to the cost of paint manufacturing, and the price of paint has an inverse relationship with margins. The higher the crude oil prices, the higher the manufacturing costs, resulting in narrower profit margins. Stocks of paint manufacturers like Akzo Nobel India, Berger Paints, Indigo Paints, and Shalimar Paints may also come under pressure as crude derivatives are key raw materials for them.

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