AS CRUDE SLIPS AND FALLS, EQUITIES CRASH
By Ruma Dubey
The market is falling today as though it is a bottomless pit. Where is the bottom indeed?
And all this can be blamed on oil. The slick, black liquid has spread the color red all over the bourses, all over the world.
12-year low and resurgent concerns about global growth snapped a brief bout of stabilization in financial markets.
Today morning, price of oil sank to a 12-year low with Brent crude trading down 3% at $27.88 a barrel. Following this, shares across Asia and Europe sank lower and there is now a virtual scamper to find safer havens like US dollar and gold. Naturally, along with the 600-points fall in equities, rupee is inching closer to the record low of Rs.68.85 it had hit in August 2013. RBI stepped in and now the rupee is in check but tomorrow is another day.
This fall in oil prices, ideally should be very good news for us Indians given our import basket of oil but is has led to worry. There is a sense of panic – the underlying message is what is spooking the market. A falling oil price is an indication of economies being in trouble. And that is the worry right now, especially from China.
Panic mode set in for oil when the International Energy Agency (IEA) warned yesterday that oil markets could "drown in oversupply" in 2016. This statement comes in after sanctions against Iran were lifted and this means that more oil supply will now come into the market. Iran has issued a statement that it will be pumping in 500,000 barrels per day Iran, adding to the already glut-like global oil supply.
That’s not all. USA oil estimates indicate that its supplies have risen by 3 million barrels last week – adding to the surplus oil situation.
Oil analysts say that the markets have over reacted - both oil as well as equity markets. Today is also the expiry of the February contract , which could also be an added reason for the fall in crude price. Hopefully, the price could recover from tomorrow but the underlying weakness in oil price remains – the talk of $20/ barrel is gaining more momentum.
At the same time, those in the industry say that more oil storage space around the around could go stream this year and this will arrest the fall of falling crude price. Currently some 3 billion barrels of oil are under storage in the developed countries and this is expected to go up in the current year. The IEA has said that around 230 million barrels of new storage will be completed over the coming year, 50% of which will be located in China. Even currently some 100 million barrels storage space lay empty – if these are used, price fall can be contained.
Falling oil price is good news – let us for now concentrate on that. Companies which will benefit directly from falling crude prices will be oil refining companies like HPCL, BPCL and Indian Oil. We have already seen how Reliance has benefitted from the falling price. These are the obvious gainers. Other big gainer would be paint companies like Asian Paints, Kansai, Berger and Shalimar as 25% of their raw material cost is from a crude derivative and when that price reduces, margins will improve. Analysts say that a 10% fall in crude oil price will boost margins by at least 200 bps. Another gainer will be tyre companies which also uses crude derivatives in its raw material - in fact it has the double advantage of falling rubber prices too. Sintex is also listed as a big beneficiary as cost of its crude oil polymer, to make plastics will come down. Packaging costs will come down as it also uses petroleum derivative and that means better margins for Essel Propack and even FMCG companies. Airline stocks will also do well as falling crude will help better their balance sheets – a 10% fall in crude will lead to a 300 bps rise in EBITDA margins.