4 Sectors Will Take a Massive Hit as Oil Surges. Should You Stay Away from Them?

Earlier this month, we wrote to you about the stocks that will benefit as crude oil prices rise.

In this article, we discuss the extremely volatile nature of oil prices and how investors should be careful before investing is any stock that is related, directly or indirectly, to the oil & gas industry.

Stocks from different sectors are facing a lot of stress due to commodity price inflation. The rise is oil prices has increased input costs for a wide range of sectors.

Following the start of Russia's invasion of Ukraine, the price of petroleum, natural gas, metals, and agricultural goods skyrocketed.

Let's take a look at the top 4 sectors that are poised to suffer as crude oil prices soar.

1. Paints

The industry, which was already suffering from low demand due to the pandemic, is once again under pressure.

We are taking about the paints industry.

The price of titanium dioxide (TIO2), a crucial raw ingredient used in the production of paint, is likely to climb with the rise in crude oil prices. TIO2 is a crude oil derivative. The increase in raw material cost will raise the cost of manufacturing. This will hit their gross margins.

Out of total raw material costs incurred by paint manufacturers, 50%-60% is due to crude oil and its derivatives. In recent months, many Indian paint companies have raised their prices numerous times, but not enough to offset increasing raw material costs.

This is the main reason behind the denting of investors' confidence in paint stocks.

Another factor that may worry the industry is weak demand from commercial real estate and the auto industry.

Many paint stocks including sector leader, Asian paints, has corrected over 15% since the start of the year.

Besides the market leader, Berger Paints has also lost up to 13% in the same period. Shares of Indigo Paints have delivered negative returns of 23% over the last two months.

2. Auto

It seems the Indian auto industry is heading towards a spell of disruption amid high competition and rising raw material costs.

The spike in international crude oil prices has come as another blow to India's beleaguered auto sector.

The auto industry had just begun to see light at the end of the tunnel in January 2022, in terms of addressing the semiconductor shortage, but the crisis in Ukraine has made the situation even worse.

As oil prices are rising, freight rates are also moving upwards, affecting the cost of raw materials.

Apart from shortage of semiconductors, there are several headwinds for the sector - rising metal costs, rising crude oil prices and an imminent fuel price hike following the elections.

Shares of Tata Motors and Maruti Suzuki are witnessing heavy selling pressure. The stocks of both the companies are trading down by 16% and 5.5% over the last two months.

Meanwhile, Mahindra & Mahindra (M&M) and Ashok Leyland have delivered poor returns of 11.4% and 17.1% on the BSE for the same period.

3. Aviation

Airline stocks are very sensitive to the movement of crude oil prices.

If the price of oil continues its upward rally, it would lead to an increase in aviation turbine fuel (ATF) prices.

This is a worry for airlines as fuel accounts for a lion's share of their operating expenses. As per reports, 40% of the raw material cost in any airline, is for ATF. Rising ATF prices will have a direct impact on the company's profitability.

To combat this, airlines in India have opted to pass on the rising cost of jet fuel to passengers, leading to a sharp rise in airfares. As demand grows, prices are also expected to rise further.

Aviation turbine fuel has surged 63% over the past year to a record high. On 1 March 2022, jet fuel price shot to Rs 96,478 per kilolitre.

The rate is higher than the previous record of Rs 71,028 per kilolitre reached in August 2008, when international crude oil prices touched US$ 147 per barrel.

The three listed - Interglobe Aviation (IndiGo), Jet Airways and Spice Jet - have corrected more than 10% since January 2022.

Moreover, the global air space battle has also affected the airline industry as a whole.

4. Chemicals

Many chemical producers were caught off guard by the substantial rise in oil prices. The economic repercussions of the Ukraine-Russia conflict are being felt across the global chemical industry.

The chemical sector's fundamentals also had just recently begun to improve but the war has reignited concerns. Going ahead, there's a possibility that profit margins will be impacted.

Crude oil is a major cost driver in the petrochemical industry because many of the key chemical building blocks (aromatics, ethylene, and propylene) for the industry's products are directly produced from oil or its derivatives (naphtha and liquefied petroleum gas).

Some chemicals, such as chlorine, are manufactured in very energy-intensive ways and have a significant relationship to oil prices. Oil price fluctuations have a direct and considerable influence on the cost of these compounds.

Aside from that, the depreciation of the Indian rupee against the Chinese renminbi suggests increased competitiveness for exporters who compete directly with Chinese firm.

These concerns have dented the stocks' performance on the bourses. Deepak Nitrite, NOCIL, and Alkyl Amines have tumbled up to 20% year to date (YTD). Shares of the largecap chemical company, UPL is down by 5% YTD.

Apart from these sectors, consumer durables, fertilisers, FMCG, cement, and real estate will be under pressure due to the commodity price rise due to the crisis.

Should you stay away from these sectors?

The duration of the conflict and the impact of sanctions on Russia and its crude oil supply will play a crucial role in the turnaround of all these industries in the coming months.

If the war like situation continues, these sectors won't deliver a good performance in the short-to-medium term due to rising commodity prices.

Also, the trend of US inflation, the European Central Bank's monetary policy, and the post-election environment could create more headwinds.

As a result, investors need to be very careful when choosing stocks from these sectors. Focus on firms that can withstand storms as they will be better positioned to succeed.

Two months back, Brijesh Bhatia discussed two sectors for 2022 in a Fast Profits Daily video.

Last year, Brijesh had said his top sectoral pick for 2021 was metals. This sector beat the Nifty handsomely. At one point, it was up 90% in 2021.

So what about 2022? Which sector will outperform? Brijesh answers this question in the video below.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...