Crude Oil Price Surge Drags OMCs, Paints, Aviation, and Tyre Stocks: Why Crude-Sensitive Shares Are Falling Today

Crude sensitive stocks witnessed losses in early trade on September 2. While shares of oil and gas companies came under pressure, stocks of companies which make paints, tyres and other petroleum derivatives also traded in the red. Shares of aviation companies also traded in the red.

The early losses followed a hike in crude oil prices, which surged in global markets. On September 2, Brent crude futures climbed above $95 per barrel, registering an increase of nearly 1 per cent, while US West Texas Intermediate crude breached the $90 mark.

This sharp increase is driven by escalating geopolitical tensions in the Middle East. Recent military strikes and retaliatory actions between the United States and Iran around the Strait of Hormuz have raised fresh concerns over supply disruptions. Since a massive portion of the world's crude passes through the shipping route, any escalation in conflict threatens to disrupt energy flows and tighten global supply, causing crude prices to spike.

Nifty Oil and Gas In Red

The Nifty Oil and Gas Index fell 1.04 per cent to trade at an early low of 11,025.6 points. Shares of Oil Marketing Companies (OMCs) fell in early trade with Bharat Petroleum Corporation shares falling 1.74 per cent to trade at a low of Rs 312.1 apiece on the NSE. Shares of Hindustan Petroleum Corporation fell 1.95 per cent to trade at Rs 356 apiece and shares of Indian Oil Corporation fell 1.59 per cent to trade at Rs 134.35 per share.

For OMCs, a surge in global crude increases raw material procurement costs. If these companies cannot pass the increased costs onto consumers by raising retail petrol and diesel prices, their marketing margins get severely squeezed, leading to lower profits.

Other constituents of the index such as Reliance Industries, Aegis Logistics, Indraprastha Gas Limited traded lower by 0.41 per cent, 0.52 per cent and 0.49 per cent respectively.

Crude Sensitive Stocks Dip

Shares of aviation companies, tyre manufacturers and paint manufacturers also traded lower amid an uptick in crude oil prices.

InterGlobe Aviation shares witnessed a drop nearly 3 per cent in early trading. For aviation companies, Aviation Turbine Fuel is the single largest operational expense. When crude oil prices rise, the cost of aviation fuel naturally spikes. Since the aviation industry operates on thin margins, airlines struggle to immediately pass higher fuel costs onto passengers, which directly eats into their operating margins.

Tyre manufacturers were similarly hit, with Apollo Tyres, MRF, CEAT and JK Tyre falling between 1 per cent and 2 per cent. Tyre manufacturers depend heavily on petroleum derivatives like synthetic rubber and carbon black as primary ingredients.

Paint manufacturers experienced broad based declines, led by Asian Paints dropping over 2 per cent, while Berger Paints and Kansai Nerolac also slipped into the red as they traded lower by 2 per cent and 1 per cent respectively. Paint manufacturers rely on crude linked derivatives such as solvents and titanium dioxide. Therefore, any hike in crude oil prices directly inflates input costs for both paint and tyre companies, putting immense pressure on operating margins and causing investors to sell off these stocks.