Airlines and OMC’s take a beating as oil moves toward four-year high

Jet Airways. (File Photo: IANS)
Jet Airways. (File Photo: IANS)

Oil prices are closing in on their four-year high and in combination with a weak rupee have brought stock prices of aviation companies and oil marketing companies (OMC’s) crashing down. Jet Airways, SpiceJet and IndiGo reached fresh 52-week lows while IOC, BPCL and HPCL fell anywhere between 2-4 percent.

These stocks are expected to remain under pressure for approximately two months as uncertainity around US sanctions on Iranian oil continues. It is expected that the pressure should come down once there is some clarity on the India-Iran situation, as the two had previously discussed keeping Iranian oil lines open post-US sanctions. The sanctions will come into effect on November 4th.

US President Trump has asked OPEC and Russia to increase their supplies to compensate for the shortfall caused due to US sanctions on Iraninan oil but his demands have failed to produce any meaningful result.

Brent crude today breached the 81 dollars per barrel mark and traders in the crude oil market believe that 90 dollars per barrel is a possibility in the near future. Crude forms the raw material needed for OMCs to function while it is a large component of the operating cost of an airline. The impact of the rising crude cost is therefore impacting the margins and profitability of both sectors. SpiceJet and Jet Airways both reported losses in Q1 of FY 2019-2020.

Disclaimer: The author is an active investor in the aviation stocks mentioned at the time of writing this article.