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“Crude” Reality

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Brent crude has consistently stayed above $ 110/bbl despite the disaster in Japan and it is safe to assume now that crude will continue to stay at such elevated levels as long as the unrest in the oil producing countries continues to simmer. The Libyan ruler Gaddafi continues to call the shots even as NATO is carrying out targeted air strikes within Libyan territory. The Yemeni President, after firing his entire Cabinet, has offered to step down but the protestors are intent on regime change. The situation in Bahrain has turned serious following the entry of Saudi troops to quell the uprising in Bahrain. The Saudi King has taken pre-emptive measures by announcing economic benefits worth $ 36 bn for the “betterment” of his people.

We remain positive on upstream companies like ONGC and OIL India as they have a neutral-positive correlation with crude prices. Moreover, both the stocks look undervalued at current levels. The state owned OMCs (IOCL, BPCL, HPCL) would continue to bear the brunt of uncertainty on subsidy sharing which would keep their shares depressed. Pending resolution of its acquisition by Vedanta, Cairn India should benefit from the huge rally in crude prices. Latest indications from the Govt. of India point towards letting the deal go through and leaving the contentious issues to be settled through arbitration.

The huge calamity in Japan has resulted in closure of ~1.5 mmbbld of refining capacity and has led to rise in diesel and fuel oil spreads. It is expected that Japan would use diesel, fuel oil and LNG for fulfilling its energy needs to replace the nuclear plants that have been shut down. Indian refiners, being diesel centric, should benefit from the surge in diesel spreads. Reports of a fall in gas production from KG-D6 are acting as a dampener on RIL; however, its refining & petrochemical divisions are performing well.

We however believe that the global economy is not strong enough to withstand elevated crude prices for a considerable length of time.

From the desk of : Deepak Darisi

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Written by Fundamental Side

March 28, 2011 at 2:55 pm