Bulls skating on crude oil movement

JAYANTA MALLICK | Updated on May 08, 2011


Significant appreciation of dollar against rupee may demolish hopes

Local equity bulls and analysts alike are seeing a short-term lifeline in the downward trend in the Brent crude, which provides the price reference for the all-important Dubai basket that the country's economy heavily relies on.

This week the equity street may see more bulls join the gang of bear-converts if crude oil bounces back. After a section of the FIIs turned sellers local bull operators were in a tight spot. But on Friday they latched on to negative crude oil outlook as the proverbial last straw.

Close to 13 per cent fall in Brent on Thursday was god-sent for the equity bulls here. It caused a pull-back on the Dalal Street and raised the hopes that crude oil market bubble may have been punctured, at least temporarily.

Unlike others in the BRIC market economies, crude oil price below $100 a barrel could be a game changer for India. Brent skidded to $110 last week. Brent crude oil futures for June 2011 delivery ended the week's trading session at $110.12 a barrel on the ICE Futures Exchange Friday evening, $15. 83 lower than previous week's closing price of $125.95 a barrel.

Goldman Sachs in April had predicted a crude oil plunge in May. It then had said that speculators' overdrive had added about $20 a barrel risk premium. On Friday, the analysts of the Wall Street's major oil player further anticipated that more limited short-term fall in oil prices was possible if the US economic data continued to disappoint. It, however, added: “We continue to believe that the oil supply-demand fundamentals will tighten further over the course of this year. It is important to emphasise that even as oil prices are pulling back from their recent highs, we expect them to return to or surpass the recent highs by next year.”

Inflation factor

Dalal Street in some ways follows Wall Street, but lacks the wherewithal to fully match up in speculative game as it is not been allowed to integrate activities all across the financial market, courtesy tighter regulations. But this does not stop some of the big players to use their own networks spread across segments other than equities.

According to market intelligence, bulls are desperately trying to arrest the FII sell-off before their own costly conversion into sellers. The arguments doing the rounds in the bull circles run like this: Even if Brent does not go down further in the short-term and stays around the current level, it would stymie New Delhi's anticipated move to increase the retail prices of petroleum products. The present Brent price means that Dubai basket crude oil import would cost just a little over $100 a barrel, the known tolerance limit for the Government.

It is felt the Government would not also like to let go a chance to reign in inflation. Now that the RBI has already done its bit for the short-term inflation control, the Government would like to wait a while and would not risk adding fuel to the “political” fire, the operators hope.

A significant appreciation of dollar against rupee in the near term, however, can demolish bulls' hope. Chances of that happening may not be ruled out altogether.


Published on May 08, 2011

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