»5 Minute Wrap Up by Equitymaster

On This Day - 6 SEPTEMBER 2018
In a Crisis, if Petrol Prices Hit Rs 100, This Stock Could Be a Good Buy

Editor's note: Dear reader, the markets are in a tricky situation. Trade wars, currency wars, rising interest rates, and rising crude oil prices are threatening many countries - Argentina, Brazil, Indonesia, South Africa, Turkey, Venezuela. I want to assure you, we're keeping a close watch on all this. More importantly, we're identifying stocks you could buy in this situation. Three months ago, our top analyst, Sarvajeet Bodas, made a bold prediction. I believe, this is the right time to revisit it. Over to you Sarvajeet...

Sarvajeet Bodas, Research analyst, The 5 Minute Wrapup

Here we go again...

Crude oil prices back to US$75/barrel levels.

Prices of petrol and diesel in Mumbai touched Rs 85 and Rs 70, respectively in no time.

And with this, 'subsidies' are back.

But who will bear the subsidy cost?

Oil producing companies? Oil marketing companies?

The central and state governments are working with oil companies to formulate a policy to curb the fuel price rise.

And with the general election less than a year away, politicians are aware of this big risk.

You see, deregulation of fuel prices was a temporary phenomenon.

Rising crude oil prices could have severe implications. Rising inflation. Rising interest rates. Pressure on the government to cut excise duty, thereby impacting its revenues.

Crude Oil Prices Rising Upward

Since oil imports form a large chunk of India's imports, it contributes to the country's trade deficit. A rise in the price of crude oil only widens the deficit further.

Ultimately, rising crude prices will have an impact on country's fiscal deficit too. Thus, the government won't be spending much on the capex revival.

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This is a recipe for a downward spiral.

Will this happen? Will petrol prices touch Rs 100? Will Indian markets crumble under the pressure of rising crude oil prices?

In my opinion, this won't be the case.

I have a theory to support my argument.

So here it goes...

Saudi Aramco, the world' biggest and most profitable oil company is coming out with an IPO.

The Saudi kingdom needs higher oil prices to entice international investors. Using its OPEC influence and authority, the kingdom is trying to restrict global supplies and pump up the price. This makes the mega offering look more appealing.

Obviously, higher crude prices mean higher valuations for the Aramco IPO.

Just imagine the valuations of Saudi Aramco at US$ 100/barrel versus US$ 40/barrel. It's a huge difference.

The IPO is expected to value Saudi Aramco at US$ 2 trillion. That's almost 6x of ExxonMobil, the world's biggest listed oil & gas company.

And it's more than 60 times bigger than ONGC, India's biggest oil & gas company.

Over the years, oil producing countries like Norway, UAE, and Qatar have successfully diversified their economies. They managed to reduce their dependence on petroleum.

Saudi Arabia wants to achieve a similar feat.

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The country's leaders created Saudi Vision 2030. It is a plan to diversify the country's economy. Saudi Arabia is looking to diversify its holdings with this IPO. Selling a stake in Aramco is the centrepiece of this grand vision to modernise the oil-rich kingdom.

BUT! And this is a big but...

If Saudi Arabia aims to drive up crude prices to triple-digit territory once again, it will only revive its biggest enemy in the form of US shale oil.

US$ 100 oil would set off yet another round of frenzied drilling, likely resulting in an even stronger wave of new shale supply.

Oil at US$100 would also impact the demand side of the equation and quickly put an end to the high growth rate in global demand.

I believe, US$ 60-65 is a sustainable range for the crude oil prices.

If crude stabilises at this level, petrol/diesel prices will fall and Tanushree's StockSelect recommendation would certainly do well. But you will need to buy the stock when the price is right.

Saudi Arabia can push the crude price to US$ 100in the pursuit of higher revenues this year... maybe next year as well. They might be able to successfully list the world's biggest IPO too.

But they will pay a big price in the long-term.

A prolonged rally in crude prices will spur US shale production perhaps to record levels and lead to a big loss in Saudi market share.

A rally to the US$100 carries the seeds of its own destruction.

Chart of the Day

The recent woes of emerging nations seem to be a never-ending affair. Every day, a new country joins the 'fragile' list.

The latest to do so is South Africa. South Africa's economy shrank by 0.7% in the second quarter. The nation is now in a recession.

South Africa joins Argentina, Turkey, and Brazil in the list of developing countries to have their currencies crash against the US dollar.

India has fared relatively better...for now.

These Countries Could Cause Our Market to Fall

The rally in crude oil has also not helped matters. We are seeing similar signs to those seen five years back.

In 2013, India was a part of 'fragile five' emerging markets along with Brazil, South Africa, Indonesia, and Turkey.

Political uncertainty, high inflation, slower growth and large fiscal deficits had dented investor confidence in Indian markets.

While the Indian economy is on a comparatively strong footing, elections next year could be a cause for worry for the market.

Any fractured mandate combined with the weak rupee and rising crude oil prices would be a recipe for pain in the short-term. The next few months could be volatile.

But no matter what happens, dear reader, we'll stay on top of it and recommend safe stocks at the right price.

Consider, Tanushree's recent StockSelect recommendation. As per the company's management, if crude sustains at US$ 60-US$ 65, one of the company's primary segments would receive a big boost.

It's just a matter of buying this stock at the right price.


Sarvajeet Bodas
Sarvajeet Bodas
Research Analyst, Smart Money Secrets

PS: Tanushree Banerjee, Equitymaster's co-head of research and editor of StockSelect, has a long history of picking safe stocks that deliver solid returns. For over 16 years, subscribers to StockSelect have received safe stock recommendations that have delivered double and triple digit gains. To receive Tanushree's StockSelect recommendations, delivered straight to your inbox, you can sign up here.

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