US sanctions on Iran: Indian macros may face collateral damage
The commentary around US’ sanctions on Iran, which have made it quite difficult for India to import cheaper oil, will likely impact key domestic macro-economic indicators, Kotak Institutional Equities said in a report.
India imported 4.3 million barrels of crude oil per day in June, of which 680,000 barrels per day came from Iran.
The research firm said that even a change of $ 10 per barrel in the price of crude oil could result in
- Impact of 50 basis points on CAD/GDP
- Impact of 30 basis points on inflation
- Modest impact on GFD through higher subsidies on kerosene and LPG
For the equity market, the nature of sanctions on oil exports from Iran will be the biggest short-term variable.
Why is there a possibility of crude oil prices rising further?
Recent statements by the US about its sanctions on Iran have brought concerns of a rise in crude oil prices back to the table.
US’ withdrawal from the Iran nuclear deal, its warning to others who conduct business with Iran, and its re-imposition of sanctions on Iran oil exports are seen as some of the reasons.
The new US sanctions, effective November 5, 2018, include:
- Purchase of oil from National Iranian Oil Company and other Iranian oil and gas companies
- Transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions
Demand-supply balance could be hit
The global oil demand-supply balance will change dramatically without Iran oil, Kotak Institutional Equities said in its report.
“Iran’s oil exports of 2.2 million barrels per day in 1HCY18 is quite large compared to available spare capacity of the OPEC. Other oil producers may find it hard to offset any cut in Iran oil exports beyond 0.5 million barrels per day. The continued decline in Venezuela oil production may further aggravate global oil supply,” the research firm said.
Portfolio positioning tricky
Kotak Institutional Equities said that there was a lack of defensives in the oil and gas sector. There are no ‘mitigating factors for investors’ in a scenario of higher oil prices, it said in its report.
Some of the other observations made by the research firm include:
- Interest rates and bond yields are likely to stay high, if not move higher. The current gap between bond and equity yields is already quite high
- ‘Defensive’ stocks are either very expensive or are bond proxies (regulated utilities)
- Government-owned upstream oil stocks (the safest hedge in theory) face the risk of unfavorable government action in the form of subsidies (we already assume some in our financial models for the companies)
- IT stocks are either expensive or have business-related challenges