StockViz

Oil is a very important natural resource, and one deciding outcome for a lot of economic activity as well. In case of US, rising crude has always preceded the next stock market slowdown. It happened recently in 2008, when oil touched its all time high nearing $150/barrel. Oil just tested the high marks of 2011 highs of $124. We will have to be concerned if it breaks the resistance. We might be up against a sudden rise of Brent and in turn a fall in the markets.

Well, India imports most of oil from Iran. Iran’s 9% of the export comes to India, and according to US, India needs to stop depending on Iran for the oil needs.

Coming onto the impact that we see on Indian market, it is no different. An increasing crude price was accompanied by falling stock market, a four day falling streak in the near past. Although as crude started falling, we did see buying happening in the markets, which pulled up the stocks back.

While tensions in Iran are escalating, there is no looking behind for the oil to fall to the 110$ levels any soon (Average price for the oil during the Sep – Dec period). Looking at how the oil producing and marketing companies are performing in contrast to the Brent.

We, see here that the oil and gas index has a bit of a preceding nature of the prices when compared to the Brent. A fall in Brent is preceded by the oil and gas index (Can be because of the delayed opening of the commodity markets in the west).

To make trades in the market, we will have to wait and watch where the oil goes from here. As far as I am concern, would be shorting till the oil is rising but would buy if it stagnates around $115 as well for the next couple of weeks.

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Crude oil, Indian economy’s biggest nemesis, is heading northwards again and further complicating the already battered macroeconomic picture. With the benchmark Indian crude oil basket flirting close to the $125/ barrel mark due to the Iran nuclear standoff, Finance Minister Pranab Mukherjee is sure to spend ‘sleepless nights’ fretting over the burgeoning subsidy bill.

In January, ratings agency Crisil noted that under recoveries on sale of regulated fuels would touch an all-time high of Rs 1.4 trillion (Rs 1, 40,000 crore ) in 2011-12 due to high crude oil prices and a weak rupee.

Since then, crude has surged even higher, from around $112/ barrel to the present level. A dollar increase in global crude oil price widens the industry’s under-recovery by Rs 4,000 crore annually and about Rs. 8,000 crore on account of every Re.1 depreciation.

The turnaround in Indian currency has cushioned the impact to some extent as the rupee has risen from 53/ dollar to around 49/ dollar presently.

But the damage has already been done. Under-recoveries on the sale of price-controlled fuels for FY-12 have skyrocketed to Rs 97,313 crore for the nine months ended December.

The under-recoveries of oil marketing companies (OMC) as on February 16, 2012 on sale of diesel is Rs 12.31 per litre, Kerosene Rs 28.77 per litre and domestic LPG Rs 378 per cylinder, data from the Petroleum Planning and Analysis Cell showed. At these levels, daily under-recovery stands at Rs 465 crore.

The last time this (subsidy bill breaching Rs 100,000 crore) happened was in FY ’09 when crude oil touched an all-time high of above $145/ barrel.

The share of subsidy burden for upstream oil companies has been hiked to 37.91 per cent for the first nine months (April-December) of this fiscal (FY 12), compared with 33% in the year-earlier period.

The soaring under-recoveries has a double whammy effect- while it would adversely affect the profitability of OMCs, it would also inflate the country’s subsidy bill which is bound to expand the fiscal deficit apart from fuelling inflationary pressures.

Fiscal deficit is expected to surpass the budgeted target of 4.6% by over 1% driven largely by bloating oil subsidies.

The Centre spent Rs 38,386 crore in petroleum subsidies in 2010-11 and estimated this fiscal year’s bill at 23,640 crore.

Even as plummeting economic growth and deteriorating business conditions have severely hit its fiscal calculations, Pranabda and his battery of economic experts will have to contend with a high import and subsidy bill unless it raises retail prices as is widely expected.