Share markets dipping by 900 points had created some confusion and also some panic among investors last week. But not for our Nagpur savvy investor. As some local pundits opined – Pratik Mukasdar, Head Research, of Badjate Stock and Shares among them – Nagpurians will see at as an ideal opportunity to invest. True to their advise, the share markets have since recovered and the real story is there is a big surge expected in coming days.
Meanwhile, we are sharing with you a report by Badajtes, explaining why oil prices fell and how the situation will benefit us ultimately.
Sir Isaac Newton was right. Gravity does affect everything. It happened to gold. So, how could crude stay insulated? Currently, you don’t need three digits to write down crude oil prices. In fact, prices aren’t just in double-digits; they’ve decreased to below $50 per barrel. Right now, “Oh my God!” can be heard in two completely different tones from different parts of the world. Let’s take a look at why oil prices fell.
The reasons behind crude oil decline:
1. Weak demand – A slowdown in global economic activity led to weak demand. In its monthly report in December, OPEC (Organization of the Petroleum Exporting Countries) projected world oil demand to “grow by 0.93 million barrels per day (or mb/d) to average around 91.13 mb/d. These projections represent a decline of 0.12 mb/d from the previous report.” The main reason for this is the decline in demand in the OECD (Organization for Economic Co-operation and Development) region. The OECD is a group of 34 countries.
2. US Shale oil boom –
What is Oil Shale:
The term oil shale generally refers to any sedimentary rock that contains solid bituminous materials (called kerogen) that are released as petroleum-like liquids when the rock is heated in the chemical process of pyrolysis. And the oil extracted from the rock is known as shale oil. Oil shale gains attention as a potential abundant source of oil whenever the price of crude oil rises. Shale oil is a substitute for conventional crude oil
Reasons for Effect of Crude Prices
1. There is potential for shale oil production to spread globally over the next couple of decades.
2. Estimated level of production:-It is estimated that global shale oil production has the potential to reach up to 14 million barrels of oil per day by 2035; this amounts to 12% of the world’s total oil supply.
3. Effect on the global GDP ratios:-In turn, we estimate this could increase the level of global GDP in 2035 by around 2.3%-3.7% (which equates to around $1.7-$2.7trillion at today’s global GDP values).
4. Effect on importers of shale oil Specifically India:-Large net oil importers such as India and Japan might see their GDP boosted by around 4%-7% by 2035, while the US, China, the Eurozone and the UK might gain by 2%-5% of GDP.
5. Effect on environment:- The environmental consequences of an increase in its production are complex and appropriate regulations will be needed to meet local and national environmental concerns. Shale oil could have adverse environmental effects by making alternative lower carbon transport fuels less attractive, but might also displace production from higher cost and more environmentally sensitive plays.
How is Shale oil produced:
1. Shale oil extraction is an uncommon industrial process for oil production. This process converts kerogen in oil shale. Oil shale converts into shale oil by pyrolysis, hydrogenation, or thermal dissolution.
2. Shale oil extraction is usually performed above ground (ex situ processing) by extracting the oil shale and then treating it in processing facilities.
3. Getting oil from rock represents perhaps the most difficult process of extraction. Currently Oil shale must be mined using either underground- or surface-mining methods. After excavation, the oil shale must undergo retorting. This is when the mined rock is exposed to the process of pyrolysis (i.e. applying extreme heat without the presence of oxygen to a substance, and producing a chemical change) Between 650 and 700 degrees Fahrenheit i.e.343 degree Celsius to 371 degree Celsius, the kerogen (material fossil fuels within the oil shale) begins to liquefy and separate from the rock. The oil-like substance that emerges can be further refined into a synthetic crude oil.
4. Heating oil shale to a sufficiently high temperature causes the chemical process of pyrolysis to yield a vapor. Upon cooling the vapor, the liquid shale oil—an unconventional oil—is separated from combustible oil-shale gas (the term shale gas can also refer to gas occurring naturally in shale’s).
3. OPEC production – In its 166th meeting held on November 27, the OPEC nations “decided to maintain the production level of 30.0 mb/d, as was agreed in December 2011.” There were expectations of a supply reduction to restore crude oil prices, but OPEC decided against it.
Impact on Indian Economy:
A lower crude oil price for a country like India (a third of our import bill is crude oil) is certainly beneficial, as it helps macroeconomic management Crude oil import in 2013¬14 was $165 billion, about 36 per cent of the total import bill. In April¬ November 2014, it was $90.3 billion, about 28.3 per cent of the total import. India also exports petroleum products and in FY14¬15 till November, these were $42.6 bn or a fifth of total exports.
Thus, India saves on foreign exchange lower oil and other global commodity prices bode well for containing inflationary pressure. A 10 per cent reduction in crude oil prices could reduce Consumer Price Index-based inflation by around 20 basis points (bps) and bring about a 30 bps rise in gross domestic product (GDP) growth. A $10 a barrel fall in oil prices reduces the country’s import bill and, hence, the current account deficit by $10 Bn or 0.48 per cent of GDP.
From June 2014, total fall in Crude from $110 to $49, thus a total fall of $61 and hence reducing the CAD by $54 Bnor 2.4% of GDP.
Impact on India Inc.:-
1. The collapse in crude oil prices has translated into lower petrol and diesel prices for Indian consumers.
2. Falling oil prices also provide a big opportunity for investors as many companies are likely to make windfall gains.
3. The following stocks get impacted because of the slump in crude oil prices:-
4. Oil marketing companies – BPCL, HPCL,& IOC – will face pressure in the near term because of inventory lossesbut in the long run lower oil prices will reduce subsidy concerns and benefit these stocks.
5. Auto companies (Maruti Suzuki, Hero MotoCorp, etc.) will benefit as the ownership cost of vehicles will comedown because of falling oil prices. . According to a calculation, a further Rs 4 per litre fall in petrol prices will lead to annual savings (assuming running of 30 km/day and mileage of 12 km/litre) of around Rs 4,000 for car owners.
6. Tyre companies (Apollo Tyres, MRF, Ceat and JK Tyres) will benefit from higher margins as 30-40 per cent of theirmaterial costs are linked to crude oil prices.
7. Consumer: The biggest gainer will be Asian Paints as a huge chunk of raw materials are linked to crude Derivatives. Godrej Consumers, HUL and Emami will benefit from lower prices of packagingMaterials,which are direct derivative of crude.
8. Power utilities such as Tata Power, Adani Enterprise and JSW Steel will benefit if benchmark thermal coal prices fall because of a drop in diesel prices. Reduction in price of diesel is also a positive for mining companies (Coal India). Fall in fuel oil will benefit private independent power producers where tariffs are not a pass-through (e.g. Adani Enterprises, Reliance Power).
9. Fall in LNG prices will benefit gas-powered power plant operators such as GVK Power, Lanco Infra, GMR Infra,Tata Power, Reliance Power and NTPC.
10. Airline stocks will also benefit as carriers spend nearly 40 per cent of their operating costs for aviation turbine Fuel (ATF).
11. Among midcaps, JBF Industries, Bata India, Supreme Industries, V-Guard Industries, Havells India, NilkamalIndustries, Relaxo Footwear, Whirlpool of India will likely be big beneficiaries of the fall in crude prices, says Domestic brokers
As a country, India for sure stands to gain from lower crude oil prices. However, currency volatility and global economic slowdown might impact exports. Beside, India is dependent upon foreign institutional investor and foreign direct investment inflows, which might get impacted. Servicing high foreign debt also might be a concern as the rupee weakens.