Sensex Ends 273 Points Lower; Oil & Gas Stocks Witness Selling

Wed, 27 Jun Closing

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After witnessing volatile trades during the day, Indian share markets ended their session on a negative note. Losses were largely seen in the oil & gas sector, power sector and capital goods sector, while IT stocks ended the day marginally higher.

At the closing bell, the BSE Sensex stood lower by 273 points (down 0.8%) and the NSE Nifty closed lower by 98 points (down 0.9%). The BSE Mid Cap index ended the day down by 1.5%, while the BSE Small Cap index ended the day down by 2%.

Asian stock markets finished on a negative note. Losses were seen on the back of growing concerns about the economic outlook amid a trade dispute with the United States. As of the most recent closing prices, the Hang Seng was down by 1.9% and the Shanghai Composite was down by 1.1%. The Nikkei 225 was down by 0.2%.

Meanwhile, European markets were trading on a positive note. The FTSE 100 was up by 0.22%. The DAX, was up by 0.23% while the CAC 40 was up by 0.18%

The rupee was trading at 68.56 to the US$ at the time of writing.

In the news from IPO space, the initial public offer (IPO) of Varroc Engineering Limited was subscribed around 54% by 3 pm today, as per the NSE data. The issue got 76.9 lakh bids against a total of 1.41 crore bids.

The price band for the issue has been fixed at Rs 965-967 per share and the auto parts manufacturer aims to raise over Rs 19.5 bn through its IPO, which is a pure offer for sale (OFS), with no fresh issue of capital.

Note that the market is gearing up for a burst of IPO activity, with at least 12 companies planning to raise more than Rs 170 bn over the next two months, after a quiet start to the June quarter.

Reportedly, the introduction of the new Indian accounting standards (IndAS) as one of the reasons why IPO-bound companies have not approached the market so far, this quarter.

All companies, including unlisted ones, having net worth of between Rs 2.5 bn to Rs 5 bn have to prepare their financial accounts for the year ended 31 March, 2018 as per the IndAS accounting standards. Companies with net worth of Rs 5 bn or more had to implement the new standard a year earlier.

Speaking of IPOs, a merit-based selection primarily including valuation, business, and management quality is the logical way to go about investing in IPOs. If it means going against the herd, so be it. And going by recent past, this strategy has been proven to be successful more often.

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In the news from commodity space, crude oil continued its uptrend and was witnessing buying interest in today's trade. Gains were seen after it was reported that the US is calling on its allies to zero out imports of oil from Iran by November 4 or else face sanctions.

As per the news, an official from the US State Department said it has plans to follow up on this matter with Turkey, India, and China. Apart from these countries, it has also sent a request to Japan to completely halt imported oil from Iran.

The rise in crude oil prices is also seen on the back of uncertainty over Libyan oil exports, a member of the Organization of the Petroleum Exporting Countries (OPEC).

Uncertainty around Libyan oil exports come as Eastern Libyan commander Khalifa Haftar's forces have handed control of oil ports to a separate National Oil Corporation (NOC) based in the East of the country. As per him, the official state-owned oil company based in the capital Tripoli, also called NOC, will not be allowed to handle that oil anymore. Haftar's Libya National Army (LNA) said that no tanker would be allowed to dock at eastern ports without permission from an NOC entity based in the main eastern city, Benghazi.

The above development came after OPEC together with a group of non-OPEC partners including top producer OPEC announced a supply rise of around 1 million barrels per day (bpd) aimed at cooling oil markets.

Note that crude oil prices have been following a rising trend lately. In the past one year alone, oil prices have surged more than 50%.

Rising crude oil prices not only affect fuel prices, but also has many other repercussions for the Indian economy.

They can be a big worry for the Modi government as well as it has been a big beneficiary of lower crude oil prices.

Have a look at the chart below. It shows India's total import bill of crude oil and petroleum products on an annual basis during the Manmohan Singh regime and the Narendra Modi regime.

Here's Why Crude Oil Was Modi's Best Friend So Far

As Ankit Shah wrote in one of the editions of The 5 Minute WrapUp...

• During the UPA II regime, India's average annual oil import bill was US$ 133 billion. In fact, in the last three years of Manmohan Singh's leadership, the oil import bill exceeded US$ 150 billion. Compare that with an average annual oil bill of US$ 95 billion during the four years of Modi's leadership.
  
  The actual savings would have been even higher, because I believe the consumption of crude oil and petroleum products would have been quite higher in the Modi era than the Manmohan era.
  
  Last Thursday, Brent crude oil prices shot above US$ 80 a barrel.
  
  This is the highest level since 2014. In the past one year alone, oil prices have surged more than 50%.
  
  Now, what if oil prices go back to the levels during the Manmohan Singh regime? What would happen to India's current account and fiscal deficit? What would happen to inflation and RBI's stance on interest rates?
  
  With the next general elections just a year away, rising crude oil prices are going to be a big worry for the Modi government.
  
  It should worry you too...

Apart from that, what does rising crude oil prices mean for stock markets?

Richa Agarwal, editor of Hidden Treasure, tracks the oil and gas sector very closely. She believes the rise in crude oil prices is a bearish sign for stock markets globally. At the same time, any market correction, will throw up interesting buying opportunities in small-cap stocks.

This is what she wrote...

• After hitting a low of US$ 30 per barrel in January 2016, prices have more than doubled to US$ 68 in April 2018.
  
  The recent news of Saudi Arabia wanting crude oil prices to touch US$ 100 per barrel doesn't help. The 2008 recession was preceded by crude oil touching US$ 150 per barrel. Any movement upwards can result in a possible downturn for the global market.
  
  While the Hidden Treasure team looks for long-term wealth creators, such macro situations can help to recommend such stocks at a bargain. The ones who keeps calm, when everyone else is losing their heads, will gain the most when the tide turns.

How the government handles this situation of rising crude oil and fuel prices remains to be seen. Meanwhile, we will keep you posted on all the developments from this space. Stay tuned.

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