Crude Shocks keep India in Smiles

“The economics of oil have changed. Some businesses will go bust, but the market will be healthier,” says the Economist (December 6, ’14). Is this the beginning of cheap oil regime or just an interlude between two big bumps?

2013, in retrospect, had turned out to be the strongest year of recovery, with growing US Economy and stabilizing Chinese economy. Commodity prices were projected to remain flat with an up-side risk due to unexpected supply-side shocks.

Enter December 2014 and all the projections seem little more than wishful thinking. IMF went on record recently: “the global economic growth may never return to pre-crisis levels” ! All the Quantitative Easing (QE) from the US (3 till now – totalling over $ 4 trillion or, twice that of the entire Indian economy) which was supposed to push cash to banks ended up just in increased valuations and stock indices accompanied by higher prices of gold and other commodities. Emerging economies like India had to contend with high inflation. Some even said: it is ‘US Fed exported inflation’!

Now we’re in a scenario where

Crude Awakening

It's indeed a crude awakening for Qaddafi, Libya's leader for the last 42 years...and given that Libya supplies nearly 1.6 mbpd (mmn barrels per day), or nearly 2% of world's oil demand, it is literally so too for the rest of the world. Crude prices are on the boil again (touching $ 100 / barrel) after being under control since the 2008 crash. Take a look at the historical crude oil (WTI, NYMEX, in USD / barrel) prices:

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And considering the impact crude usually has on the rest of the asset classes, the whole world is sitting up and taking notice of events unfolding in the African country.

The global markets not impressed, with most markets going down by 2-2.5% in the last 2 days. 

Take a look at the Dow Jones Industrial Average (DJIA) chart for the last 5 days for instance:

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Gold is moving up smartly again, touching $ 1415 / ounce, slightly below its recent multi-year high of $ 1431 / ounce. US treasury prices are moving up, implying that people still consider US T-bills safer during times of global crisis. 

A whole host of other commodities will start moving up too, since this rise in crude oil is going to trigger a rise in demand for bio-diesel (an alternative to crude), which needs, among other things, ethanol...made from sugarcane...sending the prices of sugar higher. Elsewhere in the world, import duty paid to bring in bio-diesel in the country is by-passed by bringing in bio-diesel as blended oil...for which some portion of palm oil is mixed with bio-diesel to pass it off as "blended oil". Later, through some fractionation process, these two are separated, and pure bio-diesel obtained. [That's what I've heard from some of my sources in this industry, can't confirm it though]. So an increase in demand for Bio-diesel also increases the demand and prices of palm oil, and since soybean oil is a good substitute of palm oil (for cooking), that too moves up in tandem...and since soybean oil is derived from soybean seeds, the prices of those  move up as well...and so it goes.

Given inflationary issues in almost all the countries world-wide, with an exception of the US among the bigger ones, this increase in crude prices is going to further aggravate the situation. Already high unemployment in US is going to go further up, as squeezed margins force companies to go even leaner. In India, already another price hike for diesel and petrol is being talked about...and it might come sooner rather than later.

However, at such times, solace comes from such pronouncements as given by an organization, that crude might hit $ 220 / barrel if Libya and Algeria stop oil production / exports. Usually, such "eye-catching" forecasts are given only at the end of a rally...so may be...just may be, the top is near. Let's wait and watch...and yes, in the meanwhile, stock up on cooking oil if you want to save a few bucks.

World Markets - Step on the Gas

Recently Mark Mobius said on Bloomberg: The U.S. Federal Reserve’s bond purchase plan will further drive the rally for global stocks and push commodity prices “higher and higher,”...

Couldn't agree more...with Gold to its highest price ever recorded (pushing USD 1400 / ounce) [Note: Its not an inflation adjusted price - any idea where to get that figure for the latest prices?] and Oil also looking to break-out, it looks increasingly likely that it is going to be interest rates, inflation, and growth running around in spirals trying to catch each other...with Currency dynamics popping surprise hurdles in the game.

If crude goes up, inflation mostly will...and so will related commodities like Sugar (used in ethanol - which is used in Bio-diesel - a substitute for crude oil for energy requirements), Palm Oil (with bio-diesel demand going up, Palm oil - an input in Bio-diesel also goes up), and so does Soy Oil (an alternative to palm oil in cooking), and Groundnut oil (an alternative to palm and soy oil) and others. The cost of transporting and cooking food goes up...stoking inflation further. And then people rush to Gold, traditionally considered a hedge against inflation. A depreciating dollar would help but only to a certain extent...beyond that, its upto the central banks to manage inflation.

However, consider this - while the selling price of most commodities goes through the roof, the cost of producing these commodities does not...resulting in increased margins for most commodity producing companies...(plantation, mining, drilling, etc.). So if I were to stick out my neck, I'd say go long on global commodity producers' stocks. And unlike Mobius, still avoid Airlines stocks - as for them Crude Oil is an input cost, and market share is as big a worry as margins. So increased volumes (due to increased economic activity) might just get offset against depleting margins....net result - stunted growth. Unless, of course, the airlines are hedging their input costs (intelligently)...so lets look-out for some smart financial managers in airline companies.

We're going through a rough patch, but its nothing to be worried about,...please return to your seats and put your seat belts on and enjoy the journey...!