Effect of Crude oil Prices on International Financial
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Transcript of Effect of Crude oil Prices on International Financial
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8/18/2019 Effect of Crude oil Prices on International Financial
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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
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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
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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$e!nment #!o
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O#tions nde! conside!ation a!e thoght to inclde ctting const!ction
#!o
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Nige!ia is Af!ica’s la!gest economy* "t most of the money is
concent!ated in the hands of a wealthy elite and a"ot two(thi!ds of
Nige!ians li$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
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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$e!sed%
http://www.theguardian.com/business/2014/dec/16/russian-rouble-hits-new-all-time-lowhttp://www.theguardian.com/business/2014/dec/16/russian-rouble-hits-new-all-time-lowhttp://www.theguardian.com/world/russiahttp://www.theguardian.com/business/2014/dec/16/russian-rouble-hits-new-all-time-lowhttp://www.theguardian.com/business/2014/dec/16/russian-rouble-hits-new-all-time-lowhttp://www.theguardian.com/world/russia
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Im#act on nited )tates of Ame!ica
Filling # at the gas station hasn’t "een this chea# in the ) since the
!ecession% The nationwide a$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$esto!s as the oil #!ice
has fallen* and tens of thosands of
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com#a!ed with ,-.6% In )as+atchewan* anothe! ene!gy(de#endent
!egion* the!e ha$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$e!whelming
ma
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And e$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$antage of low oil
#!ices to "ild its indst!ial "ase*; he says%
Dith a s#e!(ma
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the ma!+et this month% &t all these effo!ts ha$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
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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
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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$es% These inclde oil*
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ato* #aint* a$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 ./@%
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)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!%
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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
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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
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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@%