The Indian stock markets have always been characterized by broad linkages to operator based buying for instance when stocks used to go up during the tech boom people who were short of ideas often commented "KP is buying" as if there was an umbilical cord of information flow. These answers also suited the listeners because as an expert you needed to have all the answers. While we were in school the guy who came first was always the one who had more then 90% answers to all questions. The fact that you need to be right only 60% of the time on Dalal Street is inconsequential and irrelevant because as loyal audiences to channels like Discovery we should have all answers and if we don't it is better to take a guess with the hottest thing in town rather then simply say "No idea".
Of late when crude was headed for the skies people cried from their rooftops "China is buying - They are creating an oil reserve and are not even half way through it". The business channels beamed crude prices at one dollar intervals "Crude hits US $ 51 and 52.... and so on" they had about 50 news flashes lined up right up to the point when crude would have hit US $ 100 per barrel - after all free flow of information is all you want from these guys and that is all that they provide. The fact that they over hype the effects without looking at the causes is another matter altogether.
So why was crude rising? People who looked at the T.V all day including yours truly were thoroughly confused. One day they flashed "US crude inventory falls" and the other day "expectations of a mild winter cools off crude prices". Crude seemed to be enjoying a roller coaster ride at Disney with explanation for every cent of increase and decrease.
In the entire hullabaloo, analysts forgot the new guerrilla of the world economy "China". If the Singapores and the Thailands were the Asian Tigers then China was certainly more then the dragon it was devouring in all that it could get its hands on metals, paper, oil, steel . It was akin to a wealthy Silicon valley entrepreneur getting into a Wal Mart store just after he had sold his company at 100 times sales and buying all that he saw. The only difference being that while our Silicon valley entrepreneur used his credit card the Chinese paid hard cash and also lent some to the mall owner if he needed to get rid of his short term financial crisis.
China today consumes 1.7 barrels of oil per person and looking at the way the economic superpower of the 21 st century is adding to its demand for energy guzzling goods this figure is bound to go up many fold in the next decade and half. The car population in China is now twice of what it was in 2002 and up tenfold since 1994! India has a per capita oil consumption of only 0.7 barrels. By comparison Mexico consumes annually about 7 barrels of oil per capita and the entire Latin American continent around 4.5 barrels. In 1965 South Koreans used one barrel of oil per person by 1990, they scaled it up to 16 barrels per person. From 1950 to 1970, Japan went from one barrel to 17 barrels per person. And from 1900 to 1970, the U.S. went from one barrel to 28 barrels per person. Even if India and China were to come anywhere near these per capita oil consumption figures the business channels will have much to report and the oil consumers as much to regret.
Will Uncle Sam come to the rescue? It is clear that the US is aware of the repercussions of a rising crude. Their adventure in the Middle East is a substantial testimony to this. World over the US administration's strategic reserves have attracted quite an attention. What if the US decides to sell oil from its strategic reserve, which currently exceeds 630 million barrels? Marc Faber the eternal bull on commodities and crude opines " to sell daily 2 million barrels into the market amounting in total to 120 million barrels over a two month period would be an option if prices continued to soar". Also, since Chinese oil imports were up so far in 2004 by more than 40%, he suspects that some inventory accumulation has also occurred in the Middle Kingdom. He adds further "if the Chinese suddenly decided to curtail their oil imports the same way they stopped buying soybeans in March 2004 - an event which led to an almost 50% decline in that commodity - prices could come under some near term violent pressure". However this release of US oil reserves would in the longer term be bullish for oil since a supply overhang would have been reduced. As they say markets would do what they want to.
Here readers should distinguish that while in the early 1970's crude rose in the backdrop of slackening supply primarily instigated by the OPEC cutting production while the current oil rally is purely a function of increased demand. Faber calls the 1970s oil shock as "event driven" and today's oil price increase as being "structural in nature". Moreover since the US dollar is expected to depreciate against a basket of currencies a significant part of the rise in crude would be to offset the loss in the value of the dollar as the oil producers would like to be compensated more to make up for the rise in their local currency.
Supply constraints : On the other hand the possibility of pushing the total global oil production at above the current production levels of 80 million barrels per day is also remote. Records reflect that no major oil field has been discovered since 1965 and going by pure demand and supply logic the world seems to be running out of gas - literally.
Sectors to watch out for : A higher crude will surely be a death knell for the four-wheeler industry. Their disadvantage would work to the advantage of the two-wheeler companies. While people would not stop commuting their mode of transport would never the less be affected. A very high percentage of car buyers are the ones who graduate from the two-wheeler segments and these people would prefer riding their way to work rather pay up on rising crude.
While the oil marketing companies because of their inability to pass on increased cost to the consumers would bleed the oil producing (ONGC) and exploring companies (HOEL & Alphageo) would surely benefit.
Check out for shipping companies like Mercator lines and GE shipping that own VLCC (very large crude carriers) as there would be increased demand for the additional crude to be transported from the producing to consuming centers. While crude will be explored so would the demand for its substitutes. Here one could take a look at Praj Industries and a host of sugar companies that manufacture ethanol a product that can be mixed up to 5% with diesel .
The real trick is not as much as to exit the losers as that would be done any way but to identify the winners since the smart money would chase those stocks. Most of us are still remain unperturbed by the rise in crude. As a friend of mine remarked "how does it matter I used to get my tank filled for Rs 200 prior to the rise and now also I continue to pay the same amount". Since we are a bit clever then that taking a long-term view on crude is certainly the need of the hour. But before you panic and take the public transport for work against your gas guzzling SUV just remember that while crude isn't going to double over the next twelve to eighteen months the view over the next decade is certainly very bullish.
Disclaimer: Basant Maheshwari is a Cost Accountant and a Post Graduate Diploma in Equity Research and Analysis from ICFAI (Hyderabad), the basis of assumptions on which this report is prepared may or may not happen As always readers are expected to consult their financial advisors and exercise their own judgment in deciding whether to buy or sell a stock on the basis of these assumptions Comments are invited at &