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Crude blues! - Views on News from Equitymaster
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  • Apr 11, 2005

    Crude blues!

    With crude at near historical highs, there is not much else to focus on this Monday morning. Of course, the tech heavyweights also report their scorecard this week, which could define the sector's prospects in the near term, but the key focus remains the price rise of the 'black gold'.

    The crude prices threatened to breach US$ 60 per barrel last week, a level not ever seen in the world markets. Though a statement from OPEC indicating that they may look at hiking oil supply by a further 500,000 barrels a day did lead to cool off of the commodity, it may be just temporary relief.

    Apart from the traditional big consumers like the US, EU and other industrialized western countries, there is a new league of nations' that threatens to upset the crude demand-supply apple cart. With economies like China and India growing at a buoyant pace, the demand for the black gold continues to rise. It is no wonder that both the Asian biggies' are making moves to secure their energy interests by looking at ways to acquire stakes in global energy assets.

    For India, the situation is grave. As per estimates, India's oil demand is likely to rise from the existing 2 mbpd (million barrels per day) to 2.54 mbpd in FY06. In 9mFY05, the country's oil import bill has risen by nearly 42% as compared to the corresponding period last fiscal. Having said that, a look at the chart below, signifies the fact that while the volumes haven't changed by much, it is the soaring prices, which have led to the biggest hit.

    From the above graph, it is evident that while the volumes have increased by 10.6% YoY during FY05, the higher import bill is largely due to the sharp rise in prices, leading to a rise of nearly 22% YoY during the said period in value terms.

    Also, though right now the hit is more in terms of crude prices and not volume led, the situation is likely to change in the coming years. With the GDP averaging 6% growth, infrastructure drive continuing and efforts on to alleviate poverty, the purchasing power of the populace is likely to continually improve going forward. With this, the demand for more cars, buses and CVs etc., as well as the urge to fly, is likely to see an uptick in volumes going forward. In both FY04 and FY05, the auto sector saw volume growth in a range of 25%-30%.

    And with India able to only service 30% of its crude demand inhouse and rest through imports, the dependence on external sources will continue to remain high. In our view, the global demand supply mismatch is likely to continue growing in the long term, and this means oil prices are likely to remain strong.

    For India, with the 10-year benchmark yield breaching 7% and crude oil prices indicating strength, inflation numbers going forward are likely to be higher. That is not so good news for the economy in the near term. However, longer term, we continue to believe that India will be among the top regions that continue to attract flows towards equity.



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