Good start to Samvat 2058 - Views on News from Equitymaster

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Good start to Samvat 2058

Nov 17, 2001

Despite the shortened trading week equity markets rallied handsomely marking a good start to the traditional new year. Confidence of domestic investors was further supported by a shift to equities in the global markets. The Sensex, NASDAQ and Nikkei all rose by more than 3% this week. A breather to the global economy is the steady decline in oil prices since the September 11 incidents. The initial knee-jerk reaction led to prices climbing to 9 month highs of $31 / barrel. But since then prices have moved in only one direction -- down. Crude oil prices (Brent blend) are trading at $17.5 / barrel, touching two year lows.

Oil prices have now traded below the Organisation of Petroleum exporting Countries (OPEC) preferred price band of $22 - $28 / barrel for more than a month. The cartel had designed a mechanism for regulating oil prices. Should prices trade below $22 / barrel for ten consecutive working days the OPEC would adjust production to bring back prices within the preferred band. However, the cartel could not immediately cut production due to retaliatory action against the terrorist attacks. Also, Saudi Arabia, the largest crude producer in the world and member of the cartel, is a close ally of U.S.

A new twist to oil dynamics is the role played by non-OPEC producers. OPEC has cut 3.5 m barrels/day (mbd) this calendar year. Much of the reduced supply has been compensated with increased production from non-OPEC producers especially, Russia. Consequently, the cartel has lost marketshare. Fear, that another cut would further reduce marketshare and non-OPEC producers capitalising on the cartel's effort to push-up prices has made the OPEC wary of an independent cut in production. Consequently, the OPEC has been bargaining for a joint production cut. The cartel is contemplating curtailing production by 1.5-2 mbd with support from non-OPEC countries to the extent of 500,000 bpd. However, the negotiations have not met with much success leading to weakness in oil markets. Reports that the OPEC may adopt a strategy of choking non-OPEC producers indicates that oil prices could be headed below the $15 / barrel mark.

Weaker oil prices are beneficial for India, especially, considering the re-structuring proposed in the sector. The BSE Sensex has crossed September 11 levels of 3,150. The next resistance is at 3,300 levels.

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