The Hindu Business Line : Fishing in oily waters

The only triggers that can really re-vitalise the markets are a sharp fall in crude and forecast of a better than normal monsoon by the Met department.

MOST punters at Dalal Street were back on their high horses after that 105 points rally from the intra-day low of 6595 on Friday. A section of the marketmen even talked of 7000 in the same vein as passing the salt. Popping of the Champagne corks, however, may have to wait as Dalal Street wrestles with a little known animal called crude oil.

A host of other issues has simultaneously emerged making the investment waters a bit too muddy. The biggest issue on hand of course is crude oil. At $56.72, crude closed at an all time high on Friday on the Nymex. The Indian crude oil basket has for the first time breached the $50 a barrel mark with global oil prices touching $57.50 a barrel. While the October 2004 surge in oil prices came on the back of a concerns on supply disruptions ranging from Nigeria, Iraq and Siberia, the current spike is due to rise in demand. The issue is bigger because a supply disruption is usually temporary, demand increase is not.

The outstandings in the derivative segment are also alarming at Rs 20,000 crore. The trend of rising open interest with a fall in prices is also not something, which lends confidence. With eight more sessions to go before the March derivatives expire, and the result season lurking round the corner, I see high expectations being built, which may be difficult for the markets to surpass.

Technically, markets could see a short-term spike, the inherent strength of the Sensex stocks is rather weak. While on January 4 when the Sensex touched 6696 only one Sensex stock was below its 50 DMA, whereas 17 of the 30 Sensex stocks are now below their key medium term trend decider.

And yet the markets are beaming with confidence. The pile of Rs 4,000 crore worth of cash that the mutual funds are sitting on and the FII blitzkrieg in the last two months have pushed the markets in a false sense of complacency.

While the mutual fund war chest is a reality, to expect the FII inflows to continue at the same pace for all times to come may be asking for the moon specially with another 0.25 percentage point rate hike in the US on Tuesday is as certain. Short-term interest-rate futures contracts show market confidence that the Federal Reserve will also raise rates by quarter-point hikes in May, June and August as well. This could adversely affect FII inflows. Markets need an incremental flow of funds to trek higher. A mere reduction in the FII inflows is sufficient to send the cookie crumbling.

The only triggers that can really re-vitalise the markets are a sharp fall in crude and forecast of a better than normal monsoon by the Met department. The corporate results on their own may not have the wherewithal to lift market sentiment.

There is one sector, however, which could thrive even in a high crude regime. And that is the oil exploration sector. High crude oil prices mean higher payments for those engaged in the various services as seismic surveys, providers of drillings and production rigs, logging and cementing services. There are only a handful listed companies in the sector, with the majority being unlisted foreign companies.

With the unveiling of the New Exploration Licensing Policy-V (NELP-V) in January, 20 more blocks will be allotted to the successful bidders by May end. Apart from the existing blocks given under NELP-I to IV, these new blocks will have to be explored. This needs to be done on a time bound basis. That means huge opportunities for the sector for the next 3-5 years.

As ONGC and Oil India go ahead with their global forays, they are likely to take their competent vendors abroad, significantly increasing the size of the cake of opportunities for the domestic players.

More importantly this sector is relatively under-researched and consequently under owned by the mutual funds. Conditions are just right for smart money to move in to the sector, bringing in rich rewards for the early bird.

The author is Head of Research and Director, Anagram Securities Ltd.

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