Oil prices jump 5% amid Israel-Gaza war

Crude oil prices rose over $4 a barrel in early trade in Asia on Monday after Hamas launched a surprise attack on Israel over the weekend killing over 700 people and kidnapping more than 100.

The conflict in the Middle East is expected to escalate over the coming days as Israeli Prime Minister Benjamin Netanyahu vowed 'mighty vengeance' to punish the attackers. He even urged the residents of Gaza to leave as the Jewish nation plans to turn Hamas hideouts into rubble.

Reacting to the ongoing war, Brent crude — the global oil benchmark — jumped 4.94% to $88.76 a barrel on Monday.

This bodes ill for India's state-run oil marketing companies (OMCs) which have been forced to keep the retail fuel prices unchanged ahead of the general elections in 2024.

High crude oil prices will weaken the profitability of the three government-owned oil marketing companies in India — Indian Oil Corporation Ltd, Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporation Ltd, according to Moody's.

The three companies will have limited flexibility to pass on higher raw material costs by increasing the retail selling prices of petrol and diesel in the current fiscal year ending on March 31, 2024, says Moody's.

Marketing margins on diesel have already turned negative since August while margins on petrol have narrowed considerably over the same period, the credit rating agency says.

On Monday, shares of India's largest oil marketer, Indian Oil Corporation, fell as much as 2.6% in opening trade to ₹87 apiece on the BSE. Shares of Hindustan Petroleum Corp and Bharat Petroleum Corp dropped as much as 3% to ₹249.15 and ₹336.20 respectively on the BSE. The broader markets — the BSE benchmark Sensex and the NSE Nifty — were down half a per cent.

After very strong earnings in the quarter ended June 2023, the three OMCs' earnings will weaken in the second half of FY24 if oil prices remain elevated at current levels of $85 per barrel (bbl) - $90/bbl, according to Moody's. OMCs will start incurring EBITDA losses in the second half of fiscal 2024 if crude oil prices increase to around $100 per barrel, the rating agency says.

Moody's however, believes high oil prices are unlikely to be sustained for long as global growth weakens.

The price of crude oil jumped around 17% to more than $97/bbl in September, from an average of $78/bbl in the first quarter of FY24. An extension in production cuts by the Organization of the Petroleum Exporting Countries (OPEC) of around 1 million barrels a day until December 2023, combined with Russia's extended export cuts of around 300,000 barrels a day over the same period have driven oil prices higher.

Minister of Petroleum & Natural Gas Hardeep Singh Puri last week urged OPEC to bring affordability in the oil markets while raising concerns about the lobby's crude oil production cuts and their impact on the global energy sector.