Tag - Crude prices

This Week in a Nutshell (28Feb-4 March)

Technical talks

NIFTY opened the truncated week on 28th February at 16,482 and ended at 16,245 on 4th March. Amid the geopolitical tensions, the Indian benchmark index extended in the red for a fourth consecutive week. The index lost 1.4% during the week. The next support and resistance levels for the index would be 16,134 and 16,937 respectively. The RSI (14) of 35 indicates the index is in the oversold zone.

Among the sectoral indices, METAL (+7.0%), and IT (+2.1%) were the only gainers during the week. AUTO (-9.2%), FINANCIAL SERVICES (-5.6%), and BANK (-5.6%) led the losers.

Weekly highlights

  • Investors’ appetite was rattled by the intensifying Russia-Ukraine conflict, which obscured a much better-than-expected monthly jobs data in the USA. After Russia seized a Ukrainian nuclear plant and expanded its attack on numerous cities on Friday, all three major US indices — the Nasdaq 100, Dow Jones, and S&P 500 – closed the week in the red. As a result, investors shifted their portfolios away from risky assets and toward bonds and gold.
  • Oil prices soared to multi-year highs as Russia’s invasion of Ukraine escalated and buyers shied away from supplies from the world’s second-largest crude exporter. Brent Crude and West Texas Intermediate finished the week at USD 118 and 115 a barrel, up 20.5 percent and 25.6 percent, respectively.
  • For the month of February-22, the auto OEMs reported monthly volumes. With the easing of supply chain limitations and fresh launches, the demand for passenger vehicles (PVs) has remained strong. The market for 2Ws was muted, but premium 2Ws are seeing increased demand as chip availability improves. A modest increase in CV demand is being aided by robust demand from the infrastructure and construction sectors. Due to a high base and an extended rain that damaged the Kharif crop, tractor sales were hurt. In the medium term, the auto sector may benefit from improved rural sentiment and a healthy Rabi season.
  • Chairman of the Federal Reserve, Jerome Powell, informed the US Congress on Wednesday that he intends to propose a quarter-point interest rate rise at the Fed meeting on 16th He hinted that, depending on the effects of the Ukraine war and other circumstances, the Fed may be willing to raise rates even further.
  • The Indian manufacturing sector’s Purchasing Managers’ Index (PMI) rose to 54.9 in February from 54 in January. A reading above 50 is indicative of expansion in activities. Though there has been an improvement in manufacturing activity in February, input cost pressures remain a concern. Indians are facing the prospect of higher petrol and diesel prices once voting for the state election concludes.
  • The foreign institutional investors (FII) continued to be sellers and sold equities worth Rs 225,630 mn while Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 167,430

Things to watch out for next week

  • The report on US inflation, which is due on Thursday, will be closely watched by investors. Consumer prices increased at the quickest rate in over four decades from January to February. The future for US markets is clouded by geopolitical tensions, as Russia’s invasion of Ukraine has moderated expectations for how swiftly the Federal Reserve will tighten monetary policy in the months ahead.
  • Continuing FII selling, increasing prices of oil, food grains, and metals, and declining Rupee are leading Indian equity markets down. On Monday evening, polls for five states will close. We expect retail prices of petrol to increase substantially immediately. Exit polls on state elections may drive the sentiments in the markets before the results are announced on 10th March.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

What to do in these times?

As Indian markets continue to fall along with most other international markers, investors are wondering if this is the time to buy their favorite stocks. The latest trigger for the decline was the Russia – Ukraine conflict. The situation keeps changing every day but the impact on commodities – oil, sunflower oil, metals such as aluminum, copper and nickel, corn, wheat – prices have been immediate. The auto industry would be specifically affected as Russia is also a significant supplier of palladium a key component in semiconductor chips. Natural gas prices are already on the rise and Russia’s ejection from the global swift system could cause a lag in trade payments affecting balance sheets. The best outcome from investors’ perspective would be the cessation of hostilities and the world going back to its previous way of working. The possibility of this happening is fairly low.

Indian investors have to worry about three more developments in early March. We expect oil prices to be increased any time after 7th March (the last date of polling in UP). Credit rating agency ICRA points out that “While it is difficult to pinpoint the exact amount of lagged revision in RSPs (retail selling prices) of MS (motor spirit) and HSD (high-speed diesel) that is warranted by the surge in crude oil prices to the current levels, we expect it to be in a range of Rs 6-8/litre, i.e., similar to the cushion offered by potential excise reversion to pre-Covid rates,” its Chief Economist Aditi Nayar said in a report.

The international crude oil price, in Indian basket terms, surpassed the USD 100 per barrel mark on February 24 for the first time since September 4, 2014, the report said. The price of the Indian crude oil basket has averaged USD 93.1 per barrel so far in February 2022, a 10.5 percent surge relative to USD 84.2 per barrel in January 2022, it added.

Another development to watch out for is the results of five state assembly polls that will be announced on 10th March. Global investors are watching Fed action on interest rates to be announced on 16th March. This may bring some volatility to asset prices in emerging markets such as India.

The third development to watch will be the IPO of Life Insurance Corporation. The timing and size of the issue have not been announced yet. This could be a very large issue and reduce the liquidity in the market. Investors may sell other holdings to invest in this IPO. This could lead to a decline in share prices around the time of the IPO.

Another development to watch out for would be the conclusion of the Winter Olympics in China, which had affected the supply of key raw materials, especially heavy metals and pharma companies, due to Beijing’s determination to reduce pollution. We can expect the supply chain woes dependent on Chinese raw materials to ease, lowering the pressure on costs.

Should we add defensive sectors to the portfolio?

In uncertain economic times, investors have preferred to invest in defensive sectors like software services, pharma, and the consumer sector in the past. Is it time to do that again now?

We think the demand outlook for these sectors might not get impacted in the short term but high commodity prices will keep the margins under pressure for longer than anticipated. Companies will struggle to protect their margins and juggle between passing the inflation to consumers and cost-cutting. This may impact profit outlook adversely for the medium term eventually impacting the share prices. Industries getting impacted due to the shortage/inflation of RM and energy prices will have to cut down their discretionary spending. Companies may have to restrict ad and IT budgets to protect their margins. This may slow down the growth of Media and Entertainment and software companies in the medium term.

In summary, we think that investors should be patient with their investments before any clarity emerges on the prevailing economic issues- how the war and Indian elections affect the oil prices and Fed’s meeting on 15th March.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

This week in a nutshell (5th – 9th July)

Technical talks

NIFTY opened the week on 5th July at 15,793 and closed on 9th July at 15,690. The index made a loss of 0.6% this week. On the upside, 20DMA of 15766 might act as a resistance and on the downside, 50DMA of 15,416 might act as a support. RSI (51) trending downwards suggests a further downside hereon.

Weekly highlights

  • The government’s GST collection for the month of June was Rs 928bn, below the Rs 1000bn for the first time in eight months as the Covid-19 second wave stalled the economic activities. With most of the country under partial/full lockdowns in May, a fewer number of e-way bills were generated. The GST data for June pertains to business transactions made in May. With the easing of restrictions, there could be an improvement in the GST collections for the month of July.
  • Post the Union Cabinet reshuffle on Wednesday, the new Health Minister, Mansukh Mandaviya announced a ₹ 231bn financial package for improving the health infrastructure in the country. Under the new package, the Centre would provide ₹ 150bn and the states ₹ 80bn. The plan would be implemented jointly by them to improve medical infrastructure at primary and district health centers. The plan aims to accelerate health system preparedness for immediate responsiveness for early prevention, detection, and management of Covid-19 with a focus on infrastructure development.
  • The Organization of the Petroleum Exporting Countries (OPEC) producers canceled a meeting when major players were unable to come to an agreement to increase supply. The producers abandoned talks after negotiations failed to close the division between Saudi Arabia, and United Arab Emirates. This news pushed Brent Oil and West Texas Intermediate oil prices to levels not seen since 2018 and 2014 respectively. After a volatile week, Brent Oil futures settled at US$ 75.6 per barrel and WTI futures settled at US$ 74.6 per barrel (As on 10-07-21).
  • The monthly life insurance premium data was released by the IRDAI. There was a pickup in the business acquisition in Jun-21 with the easing of lockdowns. The new business premium (NBP) which indicates premium acquired from new policies in a particular year rose ~4% YoY. Private insurers have led the growth in NBP, reporting ~34% growth YoY. The insurance companies have adapted to the changing needs of customers and improved their digital infrastructure which is a positive.
  • Though the foreign institutional investors’ (FII) selling continued this week, the quantum was much lower at Rs 20,277mn vs Rs 54,168mn last week. Domestic institutional investors (DII) buying reduced to Rs 896mn from the Rs 64,174 mn in the previous week.

Things to watch out for next week

  • The 1QFY22 result season has already started with TCS being the first company that reported earnings this week. The result season continues next week with Mindtree, Infosys, and Wipro set to announce their earnings.

This week in a nutshell (Feb 15th to Feb 19th)

Technical Talks

During this week NIFTY declined as expected, opening on 15th Feb at 15,270 and closing on 19th Feb at 14,982, a weekly loss of 1.9%. After hitting a new high of 15,432 this week, the index has started to decline. With the RSI (58) and MACD on a declining trend, the technical indicators indicate a further possible decline. On the downside, 20DMA of 14,759 could act as a support. On the upside, 15,432 is the key level to watch out for as the last high could act as a resistance.                                                                 

Weekly highlights

  • The Indian Cabinet launched a production-linked incentive scheme (PLI) for telecommunication and networking products. The outlay of ~Rs 122bn over five years is approved for manufacturing telecom equipment, 4G/5G next generation radio access network and wireless equipment, Internet-of-Things (IoT) access devices and other wireless equipment, and equipment like switches and routers. The scheme will be operational from April 1, 2021. This scheme is expected to incentivize telecom service providers and is another push for the Prime Minister’s Atma Nirbhar Bharat plan.
  • On the other side of the world, a severe winter storm hit North America, with Texas being the worst hit. The storm has impacted crude oil output in the energy rich state of Texas and it is estimated that about 4mn barrels a day of output is offline.
  • The Brent crude futures and US West Texas Intermediate (WTI) crude futures, both corrected after rallying to 13-month highs of $65.5 and $62.3 per barrel respectively. The correction has been due to worries that refineries will take time to resume operations after the big freeze.
  • On the domestic front, consecutive hikes in petrol and diesel are pinching the pockets of Indians. The rise in international crude prices and higher central and state taxes have led to petrol prices crossing a century in some states.
  • The foreign institutional investors’ (FII) buying in Indian equity market continued to decline. FIIs inflows for the week were Rs 44,080 mn. Domestic institutional investors’ (DII) selling continued this week as well with outflows of Rs 62,840mn vs Rs 56,430 mn in the previous week.

Things to watch out

  • With the quarterly result season out of the way, the attention is now onto macroeconomic developments.
  • The benchmark 10-year bond yields have surged post the Budget announcement of additional borrowing to bridge the deficit. To keep the yields under control, RBI has held a special G-sec auction, a separate open market operation (OMO) and Operation Twist this week. Further measures by RBI will be something to watch for. Equity markets are inversely related to interest rates so increasing bond yields could lead to a decline in share prices.

Margins to improve due to crash in crude prices – Mr Surana, BPCL

Update on the Indian Equity Market:

On Monday, NIFTY50 closed 7.6% lower at 9,199, erasing the gains of Friday. All sectoral indices closed in the red with METAL (-8.9%), PVT BANK (-8.8%) and BANK (-8.3%) being impacted the most. Of the NIFTY50 components, INDUSINDBK (-18.4%), JSWSTEEL (-14.8%) and VEDL (-10.9%) were the worst performers. YESBANK was the only index component to close in the green with a 45% gain.

Margins to improve due to crash in crude prices – Mr Surana, BPCL

Excerpts from an interview with Mr M K Surana, Chairman and MD, Hindustan Petroleum Corporation Ltd. (HPCL) with CNBC -TV18 dated 9th March 2020:

  • The crash in crude prices is governed by factors different than those which are normally seen. The crash is abnormal, sharp and not guided by purely demand-side factors.
  • Mr Surana expects that in the near term, there will be softness in most Middle East crudes. This may lead to better margins on refining side in the near term. Brent Dubai differential may increase slightly, making Middle East crude slightly more favourable from refining point of view.
  • The lower crude price is good for refiners and means better margins in the near future. But the choppiness will not be correcting.
  • The gross refining margins (GRMs) and the cracks were low in the recent past. But in this particular event, the Saudi crude has reduced OSP by almost USD 6 per barrel in all markets and not just Asian markets. That should improve the cracks in the near future. In fact, the 6th March vs 9th March futures/forwards are already seeing a little jump of cracks.
  • The BPCL divestment impact on industry dynamics depends on how the divestment proceeds. Assuming private players are involved, there may be certain changes in the way businesses are picked up.
  • Sudden fall in crude causes inventory losses. However, there are still 20 days in March (at the time of the interview). After such a sudden fall, a pick up if it happens is also sharp. So, we may see days of gains also in March so the inventory will depend on the net price. However, on the margins, they are expected to be better in nearer months.
  • On the demand in India, February was better than earlier months for both diesel and petrol. Mr Surana was of the view that it is difficult to identify where the demand is coming from as many factors are working in contradictory directions.
  • As far as the Coronavirus impact is concerned, there was no impact in India in February. It is only now that concerns are being raised.

Consensus Estimate: (Source: market screener and investing.com websites)

  • The closing price of BPCL was ₹ 365/- as of 16-March-2020.  It traded at 10.9x/8.6x/8.2x the consensus earnings estimate of ₹ 33.4/ 42.4 /44.5 for FY20E/21E/22E respectively.
  • The consensus target price for BPCL is ₹ 506/- which implies a PE multiple of 11.4x on FY22E EPS of ₹ 44.5/-.