Paint, OMCs, and other oil-linked stocks in focus as crude prices slide 2%

Oil prices settled about 2% lower as concerns over possible softening of US demand and broad oversupply offset threats to output from the conflict in the Middle East and the war in Ukraine.

The International Energy Agency stated in its monthly report that the world oil supply is expected to rise more rapidly than anticipated this year due to planned output increases by OPEC+, the Organisation of the Petroleum Exporting Countries, and its allies, including Russia.

"Oil prices are falling today in response to bearish IEA headlines, which suggest massive oversupply on the oil market next year," Reuters reported, quoting Carsten Fritsch, an analyst at Commerzbank, as saying.

On Sunday, OPEC+ agreed to raise production from October. But in another report, however, OPEC kept non-OPEC supply and demand forecasts for the year unchanged, citing steady demand.

The market was torn between a perceived supply shortage due to a rise in tensions in the Middle East and Ukraine and actual oversupply from higher OPEC+ production and swelling stocks, said Tamas Varga, an analyst at PVM Oil Associates.

How does fluctuation in crude oil prices impact different sectors?

A spike in crude oil prices put pressure on the margins of oil and gas marketers due to high input costs. State-run oil marketers are unable to increase retail prices in line with global prices, which impacts their profits and subsequently share prices.

For the paint sector, crude oil derivatives account for around 25%-30% of the raw material cost of paint companies. A decline in crude oil prices eases the input cost and squeezes their margins.

Tyre makers’ margins significantly depend on crude oil, as it is a source of synthetic rubber and other petrochemicals. A fall in crude prices decreases the raw material costs for tyre manufacturers.

On the other hand, upstream companies take a hit when oil prices fall since the price at which they sell oil is determined by the market, but their costs of production are largely fixed. If it costs more to produce a barrel of oil than it would fetch on the market, producers will incur losses.

Major upstream companies in India's oil and gas sector include state-owned Oil and Natural Gas Corporation (ONGC) and Oil India Ltd. (OIL), alongside Reliance Industries Ltd. (RIL).