Monday, February 20, 2012

Oil in not well - Nymex Crude tops $105

In the recent run up in stock markets all over the world there is something that bulls have completely ignored which is oil. Oil prices jumped to a nine-month high near $105 a barrel today in Asia after Iran said it halted crude exports to Britain and France in an escalation of a dispute over the West Asian country's nuclear programme.

With Nymex crude topping $105 and brent crude crossing $120 per barrel, bulls in India at least are expected to run out of steam. Oil is a significant threat to Indian fiscal situation which is already under strain and that threat could halt the rally that we are seeing in Indian stock markets. Couple of points to consider:

1. High oil prices increases the risk of passing on some escalation in cost to end consumers which will in turn escalate inflation which is still over RBI's comfort zone. So rate cuts that markets have discounted might not come which could disappoint investors. So the rate sensitives which has had the biggest rally could retrace some of their gains.

2. High oil prices means even higher subsidy and consequently higher fiscal deficit which is already expected to be way beyond govt's own projection of 4.5%. With budget round the corner, the finance minister will have very little flexibility in provide any sops to the industry or markets. In fact there is possibility that budget might be oriented towards increasing some or the other tax to reduce the fiscal deficit.

Hence investors should be very cautious at current levels and avoid chasing the rally.

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