Thought for the day
”Life is really simple, but we insist on making it
complicated."
-
Confucius (Chinese,551-479BC)
Word for the day
Habitué (n)
One who habitually frequents a place.
(Source:
Dictionary.com)
Teaser for the day
High Court has disqualified 5 HJC MLAs with retrospective
effect.
Does it render the legislative decision taken with their
votes void ab initio?
Lucky oye!
Yesterday I expressed my concerns over investors in Indian
markets relying too much on PM Modi's luck and lower global energy prices. I
feel a prudent investment strategy needs to evaluate sustainability of both.
Insofar as the "luck" part is concerned, it is rather
simple. Considering PM's lucky time started 14yr ago, some caution would be in
order.
Energy prices are far more complex. This involves too many,
often diverging, consideration - from geo-political, economic, to financial.
To test the sustainability of current or even lower crude
prices, I divide these reasons into three distinct categories - (a) speculative
factors predicated on various conspiracy theories; (b) financial reasons
arising from currency and commodity market dynamics; and (c) economic reasons
based on global consumption/strategic storage demand and supply dynamics.
Conspiracy theories
Numerous conspiracy theories are floating around to explain the
precipitated fall in global crude prices, despite escalating geo-political
tension especially in the Middle East Asia and Eastern Europe. For example,
energy analyst Akhil Handa highlighted
the following chatter in the energy markets.
Attempt to corner Russia
Saudi not cutting the production and US increasing production to
contain Russia, which derives almost half of its revenue through oil and
oil-linked gas sales. According to Sberbank CIB, if oil prices average the
current level of $90, then Russia would run a 1.2 per cent budget deficit in
2015 and needs oil to be at about $104 to balance its budget. US and EU have
already imposed sanctions on Russia as a reprisal of Russia's Crimea annexation
and Eastern Ukraine overtures.
Saudis playing tricks to retain control of oil market
The plot thickens with another conspiracy theory doing the
rounds. The Saudi has seen the oil price stable through international
geo-political crisis, first by increasing production to accommodate Iran, Syria
and Sudan's decreasing production and then by accommodating Iraq's rising
production. Saudi has acted as the only global swing producer, which was in
control of both its oil production and economy to maintain the price stability.
However with the increase in US oil production- up almost 70
percent in the last 6 years and at its highest since 1986, the Saudi's appear
losing control over global oil market. In a bid to restore balance Saudi could
be playing its cost advantage against the higher cost shale oil producers. In
this scenario, Saudi will perhaps have to let oil prices slide to $75-80 and
let it stay there for a while for some US drillers to move out of the
businesses and hence pricing power to get restored back with Saudi.
Saudi has already made the first move by reducing its benchmark
official selling price to levels lower than the 2008 levels. The adjustment to
selling price can be a precursor to major adjustments to production, which will
have to eventually follow in case the demand scenario remains weak, in contrast
to many market observers belief that Saudi will be able to maintain its market
share.....to continue
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