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Commentary

Oil prices hit $124, How Will It Hurt?

So Oil Prices are reaching $124 and showing no signs of stopping. Means they will stop pretty soon, and reverse direction, because everyone and his uncle is predicting that the price will hit $200. That’s my theory of market versus people who make a lot of noise.

Anyhow, assuming the oil price stays this high, what happens?

  • Will etrol and diesel prices increase – remember the last increase was when the price was below $90 a barrel. But who cares really – the oil companies that market fuel are government controlled and can bleed enormously. The government will fight fuel rises to the very last breath, because it’s the last year before general elections. Private players like Shell and Reliance have already cut down retail operations massively. SO I wouldn’t expect retail prices to increase right now.
  • If they do increase, however, inflation will hit new highs as literally everything depends on such prices.
  • The price of flying goes up, as jet fuel prices aren’t subsidised. Less people fly and overall, we should see an impact on companies like Air Deccan and Jet. Airport providers like GVK and GMR will also be hit if oil prices stays this high.
  • Refiners like RIL and RPL should benefit as the heavy-light crude differentials remain high. Yet, with more refineries coming along, this may not be a very sustainable advantage in the long run.
  • The rising cost of fuel is funded partly by a falling dollar. But in India the rupee is falling against the dollar, so that’s a double whammy for us. Still, I believe the dollar reversal is a short term thing, and I hope Mr. Big Shot IT companies and Textile companies are setting up more hedges now – this is going to look very attractive a while from now.

High oil prices should usually mean higher gold prices. Yet, gold is benign. So some kind of a major trend change is happening, and I think we’re in an inflexion point yet again in the financial markets. All old links are out, new links are being formed, and the wisest person is someone who doesn’t try to predict, but follows.

  • hari says:

    >Hi Deepak,

    I am no expert in this Oil and Natural Gas sector,but in general I have a doubt.

    Can you just explain what is the effect of High crude price on companies like RIL,ONGC and RPL.
    Also is the increasing crude price the reason for the run up in the share price of Praj Ind.Also I noticed a sharp run up in the price of Hindustan Oil Exploration (HOEC).Is it all because of the run up in the crude prices?

    Regards
    hari

  • Manickkam says:

    >I remember you saying Oil prices increase has a bull effect in RIL.

    Does it mean RIL is going to increase? I wasn’t able to see any such high price rise in RIL till now!

  • Arpan says:

    >Arpan here. Before I raise my question, which I am sure a lot of us are facing right now, I want to clarify where I stand. My primary target right now for the next 12 months is 12-15% gain. Given that gold is again falling, which is very strange @124$ oil how about 50% in gold ETF, 30% in flexi debt product and 20% in some mai baap stocks like RIL? Good approach?