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Oil zips, markets dip - Views on News from Equitymaster
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  • Apr 6, 2002

    Oil zips, markets dip

    If the sharp slide on the bourses was written off as a knee jerk reaction, a month after the budget the BSE Sensex is still languishing 205 points below pre-budget levels. Does it vindicate budget bashers? Over the past month, the country has faced communal tensions, political instability and the threat of high-energy prices.

    Over the past fortnight domestic bourses have experienced sideways movement. This is not surprising considering the flat trend in markets globally. The Dow Jones registered its third consecutive weekly loss. The performance of the Nasdaq has not been any better with several technology companies continuing to give lower revenue and earnings guidance. Asian markets, which registered a sharp rise at the start of the year, have also languished in the past two weeks.

    The string attaching global market performance is likely to be war concerns in the Middle East and the adverse impact on oil prices. High-energy prices in 2000 did contribute to pushing the global economy into a slowdown over 2001. Consequently, concerns have arisen on energy prices nipping the latest economic recovery in the bud. The initial rise in oil prices was led by an economic turnaround combined with an estimated 2 m barrel/day (mbd) cut in global oil production. However, over the past month and a half the commodity has gained an estimated 22%, trading at $27/barrel (Brent blend). The rally in oil markets was triggered by possible military action against Iraq for denying inspection of arms by United Nations. Fresh round of fears have been sparked off by Israel marching into Palestinian controlled West-Bank cities. Few Islamic states have called for an oil embargo against western nations. However, oil prices are trading close to the ceiling price of $28/ barrel set by the Organisation of Petroleum Exporting Countries (OPEC). The embargo could lead to higher prices but at the same time breach ceiling levels, triggering a theoretical increase in production.

    Asian economies are less resilient to higher energy prices, which could adversely impact macro economic indicators. In FY02, India imported an estimated 567 m barrels of oil at an estimated $28 /barrel resulting in an import bill Rs 766 bn. A one-dollar increase in oil prices, not considering rupee depreciation, could hike the oil import bill by 3% or Rs 21.9 bn.

    The past 6 weeks has not brought much cheer. Resurfacing of the Ayodhya issue, communal tensions, political instability and higher energy prices. Assuming randomness of events we could have a string of positive news flow. In the coming week, market moves into the earnings season starting with the tech sector. Considering that much of the slowdown began in 4QFY01, YoY growth, especially for old economy companies, is likely to be better. This could bring back investors.



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