No more rude shocks by crude: can Indian equities rally?

Can we trust falling crude oil prices?

Analysts across the globe must be scratching their heads over this question.

On October 04, 2018, Brent crude oil made a high of USD 86. But by November 19, 2018 prices nosedived 25%.

Oil prices: just a pause or preparing for a crash landing

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Data as on November 19, 2018

(Source: U.S. Energy Information Administration)

Is there more downside left in oil? Or has it fallen more than warranted?

We will get more clarity on this in the coming weeks.

G20+ Vienna Summit= fate of crude oil?

Saudi Arabia’s crown prince, Mohammed bin Salman, and the Russian President Vladimir Putin are expected to attend the two-day long G-20 summit scheduled on November 30, 2018, and December 01, 2018 in Argentina. There’s a grapevine in the market that they might discuss the future strategy for the crude oil market as well. Saudi Arabia and Russia have been working closely to protect the market share of OPEC and allies.

Not much later, Organisation of the Petroleum Exporting Countries (OPEC) will meet at Vienna on December 06, 2018 to discuss the road ahead for countries which have oil exports as a major component of their GDP.

Here’s the background to the story…

Fundamentals of oil markets have been changing fast of late.

Until a few months ago, it was believed that the U.S. sanctions on exports of Iranian crude might make crude oil a scarce commodity. With the clouds of stringent U.S. sanctions loomed large over Iran, major oil importing nations started building-up inventories. As a result, Saudi Arabia’s crude oil production jumped significantly.

Soon after the U.S. offered import waivers to 8 nations, market dynamics changed, literally overnight.

As things stand, there’s a glut of oil in the system.

At a time when the world economic outlook isn’t encouraging, rising crude oil supplies and rising inventories have pushed oil prices southwards.

Is oil rally behind us?

Demand Suply-Crude

Source: International Energy Agency

Saudi Arabia’s Achilles heel…

Saudi Arabia has indicated its readiness to cut production by half a million barrels a day from the present record-level of nearly 11 million barrels a day. Deeper production cuts might support crude oil prices, but this decision for OPEC and allies would come at the cost of losing out market share to their U.S. counterparts. OPEC expects U.S. shale oil output will peak in late 2020. Until then, OPEC will keep losing its market share to shale oil companies.

Thus, at this juncture, lowering the output isn’t an easy decision for OPEC and its allies. To add to the worries of the world’s biggest oil cartel, U.S. President Donald Trump too doesn’t support the idea of higher oil prices.

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What to expect?

The economic growth hasn’t been strong outside the U.S.

You see oil prices go up often because of supply disruptions. In the absence of strong demand, tinkering with supply frequently isn’t easy for oil exporting nations.

Unless the U.S. withdraws waivers offered to its allies, such as India, to import Iranian oil, the fundamentals appear firmly placed in favour of weaker crude oil prices. Mere crude oil production cuts won’t underpin prices until economic growth (especially outside the U.S.) gathers pace.

If OPEC and allies maintain the current level of production despite rising inventories and falling prices, it would be a sign of world’s biggest oil cartel losing its cult. There has been news that Saudi Aramco is on a hiring spree. Usually, hiring freezes when the country is planning production cuts. Any signal for markets?

A relief for India…

By and large, falling crude oil prices may offer a sigh of relief to Indian policymakers. Falling crude oil prices will not only help India curtail its Current Account Deficit (CAD) and fiscal deficit on account of oil subsidies, but will offer the government some breathing space going into the Lok Sabha elections.

Rather than making random guesses on future price movements, which is often a futile exercise, it’s important to keep track of fundamentals.  At present, Indian markets might have absorbed the oil shocks.

Can G-20 and Vienna summit offer them positive triggers?

It looks like.

No or insignificant production cuts by OPEC will be a shot in the arms for Indian equities.

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