Effect of Crude oil Prices on International Financial

8/18/2019 Effect of Crude oil Prices on International Financial

1/17

INTERNATIONAL FINANCIAL MANAGEMENT

Assignment

The effect of OPEC’s Policies and Chinese economy downt!n on the

glo"al c!de #!ices and its effect on $a!ios indst!ies%

&y'( )a!$esh Ag!awal


2/17

A glt of oil* the demise of OPEC and wea+ening glo"al demand

com"ined to ma+e ,-./ the yea! of c!ashing oil #!ices% The cost of c!de

fell to le$els not seen fo! .. yea!s 0 and the decline may ha$e f!the! to

go%

The!e ha$e "een fo! sha!# inc!eases in the #!ice of oil in the #ast fo!

decades 0 in .123* .121* .11- and ,--4 0 and each has led to a glo"al

!ecession% &y that meas!e* a lowe! oil #!ice shold "e #ositi$e fo! the

wo!ld economy* with lowe! fel costs fo! consme!s and "sinesses in

those cont!ies that im#o!t c!de otweighing the losses to #!odcing

nations%

&t the e$idence since oil #!ices sta!ted falling f!om thei! #ea+ of 5../ a

"a!!el in Agst ,-.6 has not s##o!ted that thesis 0 o! not yet% Oil

#!odce!s ha$e ce!tainly felt the im#act of the lowe! #!ices on thei!

g!owth !ates* thei! t!ade fig!es and thei! #"lic finances "tthe!e has

"een no s!ge in consme! s#ending o! "siness in$estment elsewhe!e%

Economist still !ec+on the!e will "e a "oost f!om a lowe! oil #!ice

#a!ticla!ly if it loo+s as if the lowe! cost of c!de will "e sstained%

7ha$al 8oshi* an economist at &CA* a London("ased !esea!ch com#any*

said' 9A commodity """le has deflated th!ee times in the #ast .--

yea!s' the fi!st was afte! wo!ld wa! one: the second was afte! the .14-s

oil shoc+: the thi!d is ha##ening !ight now%;

Fo! the "ig #!odce! cont!ies* this is a ma


3/17

The +ingdom this wee+ annonced swingeing "dget cts fo! ,-.? to

add!ess an ala!ming deficit of ./@ of G7P !n # this yea!% )"sidies

fo! wate!* elect!icity and #et!olem #!odcts a!e li+ely to "e ct* and

go$e!nment #!o


4/17

O#tions nde! conside!ation a!e thoght to inclde ctting const!ction

#!o


5/17

Nige!ia is Af!ica’s la!gest economy* "t most of the money is

concent!ated in the hands of a wealthy elite and a"ot two(thi!ds of

Nige!ians li$e in #o$e!ty* acco!ding to the nited Nations de$elo#ment

#!og!amme%

nem#loyment has clim"ed this yea!* hitting 1%1@ in the thi!d =a!te!*

acco!ding to the National &!ea of )tatistics%

Ch"a E>e+wesili* !esea!ch analyst at Nige!ian Economic )mmit

G!o#* says des#ite the falling #!ice of c!de* the cont!y has "een a"le

to a$oid a


6/17

Oil and gas e#o!ts ma+e # a"ot half of the Rssian "dget* and the

!o"le !atehas "een st!ongly lin+ed to the #!ice of oil%

)anctions against Rssia* #a!ticla!ly the "an on Rssian "an+s see+ing

weste!n c!edit* com"ined with falling oil #!ices in late ,-.6 to c!eate a

#e!fect sto!m that demolished the !o"le* with the c!!ency losing half of

its $ale against the dolla!* !e$i$ing memo!ies of #!e$ios c!ashes% The

c!!ency !egained some of its $ale "y s#!ing* "t falling oil #!ices in

atmn ha$e cased it to fall "ac+ to lows simila! to those it e#e!ienced

in late ,-.6%

Falling oil #!ices we!e one of the #!inci#al !easons fo! the colla#se in the

)o$iet economy* and some economists a!e wa!ning of histo!y !e#eatingitself% Riding on a wa$e of high oil #!ices fo! most of his #!esidency* the

Rssian #!esident did not e#ect sch a sha!# downt!n% Last Octo"e!*

Ptin said that if the #!ice of oil fell "elow 54- a "a!!el* the wo!ld

economy wold c!ash% A !ange of othe! to# Rssian officials made

simila! statements* in effect !ling ot the #ossi"ility that oil cold fall

"elow 52-%

)ome analysts say the !o"le is still o$e!$aled* and the c!!ent oil #!iceshold theo!etically #sh the !o"le down f!the!% This is necessa!y to

"alance the "dget' the fewe! dolla!s Rssia !ecei$es fo! the oil it sells*

the highe! the echange !ate needs to "e fo! the "dget to !ecei$e the

!e=isite amont of !o"les% Fo! the "dget to "alance at ?/ !o"les* not

fa! off the c!!ent !ate* the #!ice of oil shold "e 52-* a !ecent &an+ of

Ame!ica Me!!ill Lynch !e#o!t fond%

Fo! o!dina!y Rssians* it cold "e a togh yea! ahead% Those who we!esed to t!a$elling a"!oad ha$e al!eady had to scale "ac+ as the !o"le

made the cost of $isiting fo!eign cities #!ohi"iti$e: and !ising food #!ices

ha$e made it ha!de! to "alance the "oo+s fo! many families%

The ,-.? "dget* fied in Octo"e!* !e=i!es oil to "e at 5/- in o!de! to

!n a 3@ deficit within 9acce#ta"le; !o"le !ate limits* meaning if the

#!ice does not !ise soon* cts will need to "e made o! !ese!$es s#ent%

The wa! in )y!ia is an et!a cost* and the annonced inc!eases inmilita!y s#ending a!e not li+ely to "e !e$e!sed%

http://www.theguardian.com/business/2014/dec/16/russian-rouble-hits-new-all-time-lowhttp://www.theguardian.com/business/2014/dec/16/russian-rouble-hits-new-all-time-lowhttp://www.theguardian.com/world/russiahttp://www.theguardian.com/business/2014/dec/16/russian-rouble-hits-new-all-time-lowhttp://www.theguardian.com/business/2014/dec/16/russian-rouble-hits-new-all-time-lowhttp://www.theguardian.com/world/russia


7/17

Im#act on nited )tates of Ame!ica

Filling # at the gas station hasn’t "een this chea# in the ) since the

!ecession% The nationwide a$e!age #!ice of a gallon of !egla! is now

5,%-, H.%3?* down /4 cents f!om this time last yea!* acco!ding to ato

cl" AAA* and e#ected to fall f!the!%

)ca!ed that No!th Ame!ica’s oil "oom th!eatens its g!i#* O#ec* the oil

ca!tel* ste##ed # #!odction and fo!ced a #!ice wa! that has d!i$en oil

#!ices down to "elow 53/ a "a!!el% ) consme!s ha$e "enefited f!om

lowe! #et!ol #!ices to the tne of a"ot 52-- a yea!* acco!ding to the )

go$e!nment* and that money is felling consme! s#ending% Acco!ding

to a !ecent !e#o!t f!om 8P Mo!gan* 4-@ of that sa$ing is "eing s#ent on

goods and se!$ices%

&t the colla#sing #!ice of oil has also cast a shadow o$e! the )

ene!gy indst!y 0 fo!me!ly one of the cont!y’s fastest g!owing

em#loye!s% F!ac+ing 0 the cont!o$e!sial #!ocess of et!acting oil and gas

f!om shale !oc+ 0 has "ecome less att!acti$e to in$esto!s as the oil #!ice

has fallen* and tens of thosands of


8/17

com#a!ed with ,-.6% In )as+atchewan* anothe! ene!gy(de#endent

!egion* the!e ha$e "een .1@ mo!esicides this yea!%

7aniel Pa$ilonis* senio! commodity "!o+e! with R8O Ft!es* said the

sitation was only li+ely to get wo!se fo! those em#loyed in the )

ene!gy secto!% 9The!e a!e oil tan+e!s la

In most of the wo!ld* falling oil #!ices ha$e cased significant !edctions

in #et!ol #!ices% &t in the cont!y with the wo!ld’s la!gest oil !ese!$es*

the oil glt cold fo!ce a #!ice !ise%

9It’s #!o"a"ly the only #lace in the wo!ld whe!e with oil #!ices so low*they may !aise gasoline #!ices*; says Ped!o MKnde>* an info!mal tai

d!i$e! in Ca!acas* the ene>elan ca#ital* who fills the tan+ of his Fo!d

Lase! fo! less than a dolla!%

&t the lowe! the #!ice of oil goes* the dee#e! ene>ela’s economy

sin+s% It’s nea! total de#endence on c!de e#o!ts fo! ha!d c!!ency has

seen the go$e!nment of #!esident Nicols Mad!o st!ggling to t!y +ee#

the economy afloat%

The #olitical effect is al!eady "eing felt% G!i##ed "y s#i!aling inflation*

ch!onic sho!tages of "asic goods and a =ic+ly de#!eciating c!!ency*

ene>elan $ote!s this month ga$e the o##osition an o$e!whelming

ma


9/17

And e$e!y d!o# in c!de #!ices means less fnding fo! the health*

edcation and hosing and othe! social welfa!e #!og!ammes that won

Mad!o’s #!edecesso!* go Ch$e>* wides#!ead s##o!t fo! his self(

styled 9&oli$a!ian !e$oltion;%

Dhile dwindling oil !e$ene h!ts the social #!og!ammes* Antonio

A>#!a* a financial consltant with CF) Pa!tne!sLA G!o#* says it

cold "e a "lessing in disgise* allowing ene>ela to wean itself of its

de#endence on c!de% 9ene>ela needs to ta+e ad$antage of low oil

#!ices to "ild its indst!ial "ase*; he says%

Dith a s#e!(ma


10/17

the ma!+et this month% &t all these effo!ts ha$e come at a time when

glo"al oil #!ices a!e falling as a !eslt of a c!de s!#ls of ,m "a!!els a

day* a #henomenon Teh!an "lames on the )adis%

9The d!o# in oil #!ices h!ts all oil #!odce!s* not


11/17

I!anian ministe! said last month that his cont!y was willing to #lay a

mae has t!igge!ed a th!ee(way "attle fo! cont!ol of what

!emains of the cont!y’s oil wealth% Mch of Li"ya’s la!gest g!o# of oil

fields* the )i!te &asin* is now held "y Islamic )tate* which has

inte!#osed itself "etween fo!ces of the !i$al go$e!nments% Most of what

!emains is in easte!n Li"ya* held "y the elected #a!liament "ased in

To"!+%

http://news.yahoo.com/iran-unveils-upgraded-model-oil-contracts-114904869--finance.htmlhttp://www.theguardian.com/world/2015/sep/27/iran-tax-oil-first-time-50-yearshttp://www.theguardian.com/world/libyahttp://www.theguardian.com/world/isishttp://news.yahoo.com/iran-unveils-upgraded-model-oil-contracts-114904869--finance.htmlhttp://www.theguardian.com/world/2015/sep/27/iran-tax-oil-first-time-50-yearshttp://www.theguardian.com/world/libyahttp://www.theguardian.com/world/isis


12/17

To"!+ is sing its stats as the inte!nationally !ecognised go$e!nment to

"attle in fo!eign co!ts fo! the !ight to income f!om othe! #!odcing fields*

o##osing the state(owned National Oil Co!#o!ation* whose head=a!te!s

!emains in T!i#oli* held "y a !i$al #a!liament%

To"!+ has set # a second National Oil Co!#o!ation* "ased in easte!n

Li"ya* and last month demanded inte!national oil com#anies switch

#ayments that c!!ently go to T!i#oli%

Conte!ing that* T!i#oli’s NOC chief* Mstafa )anallah* con$ened a

confe!ence in London in Octo"e! calling on oil "ye!s to stic+ with him%

Two of the wo!ld’s la!gest oil "ye!s* Glenco!e and itol* ha$e ag!eed*

"t the easte!n go$e!nment has $owed legal action%

London co!ts a!e li+ely to "e the #!o$ing g!ond fo! this test of wills*

with "oth go$e!nments al!eady gea!ing # fo! a #!ecedent(setting high

co!t "attle* de ea!ly net yea!* fo! cont!ol of the Li"ya In$estment

Atho!ity* the cont!y’s ?/"n so$e!eign wealth fnd%

&t whoe$e! wins cont!ol of what !emains of the oil indst!y may find it a

#y!!hic $icto!y% 8ohn amilton* di!ecto! of London’s C!oss("o!de!Info!mation* says the glt of oil on wo!ld ma!+ets and t!"lence a!ond

the few !emaining oil #o!ts means Li"yan oil has al!eady "een 9#!iced

ot; "y many "ye!s%

Im#act To India and a!ios )ecto!

C!de oil #!ices fell .2@ to 56?%/1 #e! "a!!el this yea! till 8ana!y .3*afte! sliding 62@ in ,-.6% E#e!ts a!e #!edicting a fall towa!ds 53- #e!

"a!!el% In ,-.6* they had fallen to 5/2%33 and Rs 3*?1. in glo"al and

domestic ma!+ets* !es#ecti$ely% The!e a!e conce!ns a"ot wea+ness in

the glo"al economy "t the sstained fall in c!de oil #!ices is #ositi$e

fo! IndiaQs economy* says 7i#en )hah* head* P!i$ate Client G!o#

Resea!ch* Bota+ )ec!ities%

The #!ice fall will t!anslate into hge sa$ings on im#o!ts* "esides"enefiting indst!ies that se oil and its de!i$ati$es% These inclde oil*


13/17

ato* #aint* a$iation* cosmetic and fast mo$ing consme! goods HFMCG

com#anies% Fo! instance* lowe! c!de oil #!ices will !edce in#t costs

fo! #aint com#anies as they se titanim dioide* a c!de oil de!i$ati$e*

as a !aw mate!ial% )imila!ly* the cosmetic indst!y is a hea$y se! of#a!affin* again a c!de oil de!i$ati$e%

owe$e!* most e#e!ts say that oil #!ices ha$e "ottomed ot fo! now%

This yea!* a "once("ac+ can "e e#ected f!om 56-(6,% Oil can test

5?/(24 le$els on the highe! side* says i$e+ G#ta* CMT* di!ecto!

!esea!ch* Ca#italia Glo"al Resea!ch% )gandha )achde$a* assistant

$ice #!esident and in(cha!ge* metals* ene!gy and c!!ency !esea!ch*

Religa!e )ec!ities* says* This leg of the co!!ection is e#ected to ta+e#!ices lowe!* "t the downside seems limited as of now%

LetQs see how lowe! oil #!ices will "enefit India Inc%

Oil Marketing Companies: The fall in oil #!ices s##o!ted stoc+s of oil

ma!+eting com#anies* o! OMCs* in ,-.6% &ha!at Pet!olem Co!#o!ation*

indstan Pet!olem Co!#o!ation HPCL and Indian Oil Co!#o!ation

sha!es !ose 46%26@* .,4%?3@ and /1%.?@* !es#ecti$ely* d!ing the yea!%

The fall will ha$e a #ositi$e im#act on downst!eam oil com#anies "y

lowe!ing thei! s"sidy "!den* says G#ta of Ca#italia Glo"al

Resea!ch%These com#anies ha$e "een "ea!ing the "!den of nde!(!eco$e!ies(money lost "y selling fels at #!ices set "y the go$e!nment% Ba!thi+Ranga##a* $ice #!esident* !esea!ch and edcation se!$ices* e!odha* anonline "!o+e!age* seconds G#ta% Low oil #!ices will ease OMCsQs"sidy "!den% owe$e!* in the sho!t te!m* they will sffe! an in$ento!yloss% Most OMCs ha$e in$ento!ies "oght when c!de oil was t!ading

mch highe!% Ma!+et e#e!ts a!e "llish on PCL% The com#any!egiste!ed a net #!ofit of Rs 4/-%,. c!o!e in =a!te! ended )e#tem"e!,-.6* # .?2@ f!om Rs 3.4%1, c!o!e in the same =a!te! a yea! ago%PCL is among the "ette!(managed OMCs% It will "enefit f!om lowc!de oil #!ices as s"sidy "!den falls and !ealisations im#!o$e* saysRanga##a% Paint com#anies' Paint com#anies se se$e!al c!de oil#!odcts as !aw mate!ial% Titanim dioide and othe! c!de oilde!i$ati$es sch as Phthalic Anhyd!ide and Pen!ae!yth!itol accont fo!/-@ in#t costs% owe$e!* #!ices of c!de oil de!i$ati$es mo$e mchless than that of c!de oil% Fo! instance* "!ent c!de has fallen 6/@ yea!(on(yea! while titanim dioide has co!!ected only ./@%


14/17

)hah of Bota+ )ec!ities says* As

#e! o! analysis* e$e!y 6@ fall in

#!ices of c!de oil de!i$ati$es

im#acts ma!gins "y /- "asis #oints*o! "#s* and ea!nings "y 3- "#s% Of

co!se it is $e!y difficlt to #t an

eact fig!e de to the com#le mi

of mate!ials sed "y #aint

com#anies% India has si listed

#aint com#anies% The sha!es of the

th!ee "iggest* Asian Paints* &e!ge!Paints and Bansai Ne!olac* !ose

/-%6@* 22%/@ and 23%2@*

!es#ecti$ely* last yea!%


15/17

E#e!ts !ecommend Bansai Ne!olacand &e!ge! Paints% Bansai* IndiaQsla!gest indst!ial #aint com#any* is as"sidia!y of Bansai Paints* 8a#an%

Its main consme!s a!e indst!ial*atomoti$e and #owde! coatingcom#anies%

Rise in demand fo! atomo"iles

shold "enefit Ne!olac% Falling

#!ices of oil and its de!i$ati$es*

inclding mate!ial titanim dioide*

shold im#!o$e ma!gins and!et!ns% De "elie$e the stoc+ can

toch Rs ,*6--% It toched an all(

time high of Rs ,*.-6 on 7ecem"e!

. last yea!* says )hah% &e!ge!* the

thi!d(la!gest #aint com#any* is

t!ading a!ond its all(time high of Rs

6?/% The com#any is the second(

la!gest #laye! in deco!ati$e #aints% It

!egiste!ed a net #!ofit of Rs ?2%-3

c!o!e in =a!te! ended )e#tem"e!

,-.6 as against Rs ?,%?2 c!o!e in

the same =a!te! a yea! ago% Its

$alation* thogh* is on the highe!

side% On 8ana!y /* it was t!ading at ., months t!ailing #!ice(to(ea!nings

HPE !atio of ?.%46 as against the indst!y PE of /3%21% )till* G#ta of

Ca#italia is "llish on the stoc+% It is t!ading at a high le$el and afte! a

sho!t co!!ection has "onced f!om the s##o!t of Rs 32-% It is li+ely to

!ise f!the! as it is managing to !emain a"o$e /- days and ,-- days

daily mo$ing a$e!ages% It can test Rs 6?, le$els in the coming sessions*

he says%

Auto and Tyre companies: Falling oil #!ices will lowe! the cost of!nning atomo"iles and enco!age #eo#le to "y% In ,-.6* the &)E


16/17

Ato inde !ose /.%24@ to .4*?3.% Eiche! Moto!s !ose ,-,%6,@*

followed "y Ma!ti )>+i H44%2/@* e!o MotoCo!# H64%22@ and Tata

Moto!s H3,%33@% Ale Mathews* head of !esea!ch* Geo


17/17

H"y ctting fa!es will "e offset to an etent "y the stee# #!ice ct% O$e!all

the fall in c!de oil #!ices is #ositi$e fo! the a$iation secto!%

FMCG: C!de oil de!i$ati$es accont fo! a "ig #a!t of !aw mate!ial costs

of se$e!al FMCG com#anies% Nota"le de!i$ati$es a!e 7PE

H#ac+aging* LLP Hc!eams and hai! oils and LA& Hdete!gents% 7ecline in

7PE #!ices will !edce costs ac!oss the secto!* while fall in LA& and

LLP will im#act dete!gent and #e!sonal ca!e com#anies%

E#e!ts "elie$e #ac+aging acconts fo! ./(3-@ costs fo! FMCG

com#anies and so fall in c!de oil #!ices is estimated to "oost ma!gins

"y ?(4@% )hah of Bota+ says* Dhile decline in c!de oil #!ices shallha$e an im#act on $a!ios FMCG com#anies* it is ha!d to say what the

net im#act on ea!nings will "e o$e! the medim te!m% In the immediate

te!m* we "elie$e the im#act will "e #ositi$e% The im#act shall "e high on

indstan nile$e!* followed "y 7a"! and Ma!ico% Last yea!* the &)E

FMCG inde had !isen .4@ to 2*2??%/2% &!itannia Indst!ies !ose

.--%6@ to Rs .*46-% It was followed "y Emami H?/%2@* Ma!ico H61%3@

and 7a"! India H3/%4@%

Effect of Crude oil Prices on International Financial

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Transcript of Effect of Crude oil Prices on International Financial