Oil prices set to crash - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Oil prices set to crash 

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In this issue:
» Roubini predicts oil to crash, dollar as doomed
» Rain gods hold India ransom
» Europe looking at 'exiting' recession
» Day of 'divestment' finally comes closer
» ...and more!

Contradictory opinions, especially that of economists, have been flying thick and fast since the start of the credit crisis. But few have had the outright clarity and definiteness like the one you are about to hear next. Adroit economist Nouriel Roubini has very categorically stated that the dollar will not be able to continue its status as the global reserve currency*. This, he feels, is because emerging markets will create a 'fundamental change', in the global economy as they continue to grow. Further, he also opined that China's economy would surpass the United States'.

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Over time, the willingness of the US creditors to finance and buy dollar reserves is going to be reduced, largely affected by people getting nervous about the US devaluing or inflating its way out of the debt problem and causing real losses on the holdings of those assets. However, Roubini feels the dollar will not lose its status anytime soon as decline of major reserve currencies do not occur overnight and it is a slow process that takes decades. "This century could be the Asian or Chinese century, but that will occur over time", said Roubini.

Oil price: Will the rally continue?
Data Source: CNNfn
Roubini also expects oil prices, which have run up "too high, too soon", to crash. As you know, the run up in oil in the past few months has been driven by a China's stockpiling and a weakened US dollar and a belief that recovery is just around the corner. Now, as the dollar has been gaining over the past few days, the price of oil has slipped. Roubini sees deflation as one of the key reasons that could lead to the price of oil sliding.

*A reserve currency is one which is held by many nations around the world as significant part of their forex reserves and also is the international pricing currency for important products traded on the global market.

And what Roubini is predicting for the dollar, the US government officials are busy disposing. As reported, the US Treasury will auction bonds to the tune of US$ 104 bn next week, a dangerously high, and record amount. This will take the tally of total debt issued this year to US$ 2 trillion. This deluge of supply is worrying the US government bond market, but as they say - desperate times call for desperate measures.

The European Union nations are pretty upbeat about their economies as they seem to have spotted the first signs of a 'sustainable economic recovery' from the worst slump since the Great Depression. In fact, they have gone on to add that no more stimulus packages will be required and this would be the time to start contemplating on an 'exit strategy' in view of a possible end to the recession.

This is in contrast to US Treasury Secretary Timothy Geithner's stand that it was too early to shift towards policy restraint. The EU leaders were also in agreement on a complete overhaul of financial regulation especially with respect to banks given that they were badly hit in this financial crisis.

Meanwhile, EU nations have a challenging task on their hands of curbing the fiscal deficit, which is expected to soar to 6% of GDP in 2009 compared to 2.3% last year. Signs of revival seem to be apparent in various economies across the world but whether these are just short bursts or whether they will translate into a sustained and meaningful recovery is the million dollar question.

A sign that the much anticipated divestment process may by the government may kick of soon came in yesterday as Minister of Heavy Industries Vilasrao Deshmukh said the government is considering selling up to 10% stake in BHEL, in which it owns about 67% stake currently. These plans have long been on the cards but were stymied by the opposition from the Left that was part of the earlier government. But with things finally seeming to be going somewhere, we are surely not complaining.

Although we are well into the 21st century, it is hard to overstate the importance of the monsoons to the Indian economy. The fortunes of India's hinterland continues to be greatly dependent on the monsoons although government polices play a crucial role. The delay in this year's monsoon in several parts of the country is causing anxiety to not only the agriculture sector but also to players in FMCG, auto and consumer durables, as per a leading business daily.

This shouldn't come as a surprise because much of the growth in these sectors over the last 5 to 6 quarters has come from rural India. No wonder then that FMCG majors Hindustan Unilever, Dabur and Godrej have introduced packs specifically for the rural consumers. Similarly, auto companies like Hero Honda and Maruti with strong rural presence have outperformed their peers.

We wonder if we should be at peace with the present situation of India's irrigation network. At some point, we will have to bring about massive improvement in the system so that natural events do not hold the entire economy to ransom. Interestingly, certain parts of our country regularly get flooded even while certain parts receive insufficient rainfall - may be this is one area where human interventions would be desirable.

After fourteen straight weeks of rally led by realty and infrastructure stocks, the Indian markets had a volatile trading session this week. The benchmark BSE-Sensex declined week-on-week by almost 700 points (4.7%), though it still trades 78% higher than its lows touched on March 9th. With the exception of China (index up 3%), weakness was all pervading in other Asian markets. The key benchmark indices of Japan and Hong Kong ended 4-5% down. As for other global markets, key indices in the US, Brazil and UK all closed with losses in the range of 2-4%.
Todays market: Performance of world market Todays market: Performance of asian market
Source: Yahoo Finance Source: Yahoo Finance

Commodity stocks were amongst the biggest losers during the week across the world. In India as well, the BSE-Metal and BSE-Oil and Gas indices were at the receiving end given that these posted losses of 10% and 11% respectively. The pressure on stocks from the sector was seemingly on the back of fears that commodity prices have entered a bubble phase following China massive purchases, not for satisfying the current demand but for stock piling. Indirectly, this would suggest that once the country stops this buying binge, it would be difficult for commodities (like oil and metals) to sustain the recent advance. It may be noted that crude oil prices have already doubled in price since mid-February.

Coming back to the Indian markets, to say the least, trading was extremely volatile throughout the week. Apart from metal and oil & gas stocks, those from the realty space were among the biggest losers following the euphoria with which they had risen for the previous three months. This is also considering the fact that these stocks (as also from the infrastructure space) that have seen the maximum rise since this rally began in March still have weak fundamentals - overextended balance sheets, depleting profitability, and weak demand. The buying in them was overdone and thus selling followed.

04:46  Weekend investing mantra
"...even when the underlying motive of purchase (of stocks) is mere speculative greed, human nature desires to conceal this unlovely impulse behind a screen of apparent logic and good sense" - Benjamin Graham
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6 Responses to "Oil prices set to crash"


Jun 23, 2009

Your 5 min wrapup is good. But new investors like me are finding it difficult to understand terminology used in the messages. If your recommendations are specific about particular stocks, It will help us to understand the same, rather than generalising like metallic stock, banking stock. etc.



Jun 21, 2009

Inter Linking of Rivers needs to be projected in your widely read articals to overcome dependence on natural
resources for our rural economy and food sufficieny in the future.



Jun 20, 2009

your wrapup is a good one and everyone should read it



Jun 20, 2009




Jun 20, 2009

Oil may dip temporarily but is set to soar in the medium term.I am bullish on Selan and HOEC though both will go lower for time being.

Like (1)

Gaurav Sri Krishna

Jun 20, 2009

The 5 minute wrapup is a great read. Crisp with the right insight.
Highly appreciate if you guys can come out with a weekly round up in a similar format.

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