Trump Factor: Decoding the potential impact on crude prices and India’s oil economy

Energy markets are attempting to understand the implications of Donald Trump's presidency on oil and gas prices. Analysts predict that his actions could significantly influence global crude oil prices, with an 80% likelihood of a decline. However, there are a few factors that could drive prices higher.

Moreover, experts believe that although most of Trump's policies are likely to have a bearish impact on prices, there is significant upside potential in his focus on 'increased drilling' and trade policies. Trade-related uncertainties and tensions continue to pose challenges for crude oil prices, particularly affecting energy prices in the US. There may be counterproductive effects on US exports resulting from the tariffs imposed on imports.

"US oil production means a well drilling cost requirement of $64/ bbl. Hence the degree of “Drilling” would be muted. Going forward, in a couple of years these costs could scale up to $67 and $70 range as per the forward prices," said NS Ramaswamy, Head CRM & Commodities of Ventura Securities.

On the other side, Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services pointed out that since Trump is pro-fossil fuel, his regime is likely to give tax incentives for capital investment in the exploration and production of fossil fuels. This policy will keep crude prices soft, he opined.

“Since US is the largest producer of crude in the world now, OPEC is not as powerful as it used to be. This trend will accelerate with the potential to bring crude prices further down, going forward,” said Vijayakumar.

What does softening of crude prices mean to India?

Overall, declining crude prices can lead to various advantages for India, such as reduced import expenditure, decreased inflation, improved profit margins for industries, and enhanced performance in Indian stock markets.

“Softening crude price will be a macro positive for India which will help us to keep the current account deficit and fiscal deficit down, thereby imparting macro stability to the economy. An added positive is that this will lower inflation thereby enabling the MPC to cut rates early in 2025. Industries such as paints, tyres, adhesives and aviation, which use crude derivatives as inputs, will gain from the potential decline in crude prices,” said Dr. V K Vijayakumar.

However, in this case (Trump presidency), according to a few experts, India finds itself in a dilemma; if the trading range stays between $65 and $70, it may persist with imports from Russia. Continuing these imports could have repercussions on fiscal policy. With Trump likely to maintain a strong relationship with India, this could contribute to inflationary pressures. In any case, the status of our currency remains uncertain.

“If things move the US way, crude would be in a benign $65-70 range. For India this has to be viewed in the context of discounted Crude we get from Russia. Hence, India may be caught in a peculiar cleft with consequent pressure to raise pump prices (inflationary) or lower taxes on petrol and diesel (hurts fiscal). However, revised bilateral Indo-US trade terms are likely to disturb our currency. A conundrum is on the cards for India,” explained NS Ramaswamy Head CRM & Commodities of Ventura Securities.

Crude oil futures fell by ₹8 to ₹5,948 per barrel in Monday's futures trading as traders adjusted their positions due to weak demand, as per reports. On the global stage, West Texas Intermediate crude was down 0.14% at USD 70.28 per barrel, while Brent crude remained flat at USD 73.87 per barrel in New York.

Stocks in focus

Brokerage house Emkay Global Financial Services in its report stated that oil marketing companies (OMCs) and airlines are the cleanest Trump Trade.

The brokerage highlights two major reasons for a bearish outlook on oil: OPEC's market share has decreased by 10 percentage points to 47% over the past ten years, which they must accept to implement production cuts, and Trump has advocated for increased investments in fossil fuels. Overall, both the underlying market conditions and the consistent policy backing indicate a rise in production and a decline in prices in the years to come.

Emkay's top pick is Hindustan Petroleum Corporation Limited (HPCL). "We are super bullish on OMCs, given the context of structurally lower oil prices and the re-rating potential. Consider HPCL: a) Every Qtr, HPCL refines about 6.2mn ton of crude at the current depressed level of GRM at USD4.8/bbl – gross profit flow will be approximately Rs18bn [6.3 x 4.8 x 7.1 (ton to bbl) x 84 (USD/R rate)]; this could move up or down a bit, but there's no reason to be constructive either," the brokerage said.

As per the report, HPCL has a market capitalisation of approximately ₹810 billion; when considering only its investments, the figure is about ₹700 billion.

“Super-normal quarterly profit in Q3 could be an aberration, which may continue for a few quarters till previous under-recoveries are recouped. Nevertheless, OMCs’ profitability will be far more predictable, with low and stable oil prices. One can model recurring profits of about Rs80/90bn. We believe that the risk/return metric solidly favours investors,” the brokerage added.

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decision.