Oil producers start investing surplus across globe as economies turn around

India needs to convince them about return potential to attract that money

Crude oil price, especially Brent, which is still used as a benchmark in India, is trading at around $84 a barrel, a level seen after June 2014. The past three or four quarters of consistently higher prices have helped oil-producing countries to turn their economies around. The fact that they have started investing their surpluses in global assets presents an opportunity for India to attract that flow and hedge withdrawals by other foreign investors.

Oil producing countries’ fiscal situation, which had worsened when prices fell to $25-$30, has now improved to a level in which their current realisations are sufficient enough for them to balance their budgets and wipe out the deficit of the past.

While some like Venezuela, Nigeria, Algeria are still not quite comfortable. several others have stated generating and investing their surpluses in assets across the globe. But while India has an opportunity to attract that money, the present time in the country is challenging.

Nilesh Shah, MD, Kotak Mahindra Asset Management Co Ltd, says, “Oil exporting nations have generated surplus with oil prices moving from $40-60 dollar range to $80-plus. Many countries in the Nordic region have also balanced their economies and reduced dependency on oil. They are investing their surpluses across the world, with rising oil prices, in a professional manner.”

He adds, “There are countries in Latin America and Africa whose economies are closely linked with oil and even at current prices, they have an issue in balancing their budget. However, Middle Eastern countries like Qatar, Abu Dhabi, Kuwait are following the Nordic model to allocate surplus money across the globe.”

Earlier these countries were large investors in Indian assets.

Shah says, “Many of the oil exporting countries see India as a natural hedge (due to high demand for the crude oil they produce) and an attractive market. We have seen participation from oil exporting countries in Indian assets from venture capital and private equity to fixed income, equity markets and real estate markets. We can attract money from oil exporting countries if we can convince them on the return potential of Indian assets, but that is not an easy task.”

India’s challenges are high oil price, a declining rupee, rising interest rates and upcoming elections. So foreigners are shying away from the country as of now, which explains why India may not be in a state to encash that opportunity in the near future.

Christopher Wood Equity Strategist, CLSA said in his GREED & fear report, “Oil is (seen) heading much higher unless demand suddenly collapses in the emerging world, and so far, there is little sign of this." He advised global equity investors to go overweight on energy stocks. As for Asian and emerging market investors, they need to continue to hedge their Asian domestic demand plays with stocks that will benefit from a higher oil price.

Madan Sabnavis, chief economist at Care Ratings explains which companies will benefit from high oil price. He says, “High oil and natural gas prices will benefit upstream oil and gas exploration companies like ONGC, Oil India and Reliance Industries as higher gas prices will lead to higher earnings, due to improvement in per unit realisations in the natural gas segment. This augurs well as it encourages upstream companies to take up more exploration activities. India can expect more foreign investments towards the upstream gas E&P sector.”

Oil prices are expected to stay high in the medium term. In the near term, momentum is bullish but there are hopes Russia and Opec will release more oil to fill the gap created by Iran’s falling supplies post US sanctions.

Nigam Arora, the author of The Arora Report and an expert who has been tracking financial markets closely for over three decades, says, “Sanctions on Iran will take 500,000 to two million barrels of oil out of the market. In our analysis in The Arora Report, Opec and Russia will end up producing additional 500,000 to 1.5 million barrels.  These numbers indicate that Brent crude is not likely to go to $100 in near term unless there is a new geopolitical development.”

Opec nations are expected to raise output following their upcoming meeting in November.

According to an analysis by London-based investment bank Natixis, “US produces and refineries have largely hit light sweet saturation; every incremental barrel will, therefore, need to be exported next year. Europe and Asia are their target markets.” Joel Hancock, oil analyst at Natixis says, “We maintain a view that on the two-year horizon, prices will remain constructive, but the path will likely be choppier than previous years.”

According to Natixis, Opec is expected to raises oil production in its November meeting, which could help moderate oil price. In the first quarter of 2019, Natixis expects Brent to average $79 per barrel from an estimated average price of $81 for the December quarter, but after that, in every quarter in 2019, the average three-monthly price will go up with Q4-19 price projected to go up to $86. This means that in the mid-term, there is no respite from high prices.