The price of crude oil has just hit record levels in rupee terms. This is as much a function of the rupee falling as of crude oil rising. If the Syrian situation gets any tenser, it may cause a panic spike in crude oil prices. Syria is not a major exporter but it's in the middle of the world's largest crude export zone.
Most analysts concur that Brent crude is unlikely to fall below $105 a barrel until and unless the Syria situation eases. Prices swung to a six-month high of $117.50 on Wednesday in New York. Meanwhile, the rupee nose-dived.
Cumulatively, the Indian crude basket has become 20 per cent more expensive in rupee terms in the last three months. Public sector units (PSUs) in the refining and marketing segment are already under the gun and will come under more pressure. As it is, the falling rupee has wiped the positive effects of the gradual price rationalisation in diesel. No mandated price rationalisation can match the changes in the forex markets and the energy commodity markets in such a volatile situation.
The government will directly pick up only a third of the under-recoveries. The rest will have to be borne by the PSUs themselves. Obviously, this will hit profitability and, more than that, it will immensely stress cash-flows at a point when these importers are struggling to manage their forex exposures.
There are some interesting trading possibilities. If the rupee stays down, and crude stays up, PSUs like HPCL, BPCL and ONGC will all yield lucrative shorts in the stock futures segment. This could be highly profitable and, indeed, these stocks are all moving downwards.
One complexity is that carryover will be necessary since this is on the verge of settlement. Since all these stocks are in long-term downtrends, the short positions look relatively safe. However, there could be a sudden bounce if the rupee strengthens sharply, or crude oil drops in price.
The trader will need to set trailing stop losses as is usual on this sort of trade. By rule of thumb, one would look for BPCL, HPCL and ONGC to hit new 52-week lows. It would make sense to set stop losses at four-five per cent above the current prices.
Another intriguing possibility is the government will be forced to review subsidy mechanisms. This is the economically sensible thing to do. But it would be politically dangerous due to the scenario of fuel price rises triggering inflation as elections approach.
Therefore, review subsidy mechanisms will happen only in a 'perfect storm'. Such a storm would, however, result if the rupee fell till Rs 69-70 and crude oil pushed above $130 a barrel or so. The combination would mean a 20-25 per cent rise in the cost of the Indian basket. The cited rupee level and crude oil levels both look possible. If it does happen, and the government is forced to liberalise energy prices, there will probably be a big bounce in the energy-sector PSUs.
Most analysts concur that Brent crude is unlikely to fall below $105 a barrel until and unless the Syria situation eases. Prices swung to a six-month high of $117.50 on Wednesday in New York. Meanwhile, the rupee nose-dived.
Cumulatively, the Indian crude basket has become 20 per cent more expensive in rupee terms in the last three months. Public sector units (PSUs) in the refining and marketing segment are already under the gun and will come under more pressure. As it is, the falling rupee has wiped the positive effects of the gradual price rationalisation in diesel. No mandated price rationalisation can match the changes in the forex markets and the energy commodity markets in such a volatile situation.
The government will directly pick up only a third of the under-recoveries. The rest will have to be borne by the PSUs themselves. Obviously, this will hit profitability and, more than that, it will immensely stress cash-flows at a point when these importers are struggling to manage their forex exposures.
There are some interesting trading possibilities. If the rupee stays down, and crude stays up, PSUs like HPCL, BPCL and ONGC will all yield lucrative shorts in the stock futures segment. This could be highly profitable and, indeed, these stocks are all moving downwards.
One complexity is that carryover will be necessary since this is on the verge of settlement. Since all these stocks are in long-term downtrends, the short positions look relatively safe. However, there could be a sudden bounce if the rupee strengthens sharply, or crude oil drops in price.
The trader will need to set trailing stop losses as is usual on this sort of trade. By rule of thumb, one would look for BPCL, HPCL and ONGC to hit new 52-week lows. It would make sense to set stop losses at four-five per cent above the current prices.
Another intriguing possibility is the government will be forced to review subsidy mechanisms. This is the economically sensible thing to do. But it would be politically dangerous due to the scenario of fuel price rises triggering inflation as elections approach.
Therefore, review subsidy mechanisms will happen only in a 'perfect storm'. Such a storm would, however, result if the rupee fell till Rs 69-70 and crude oil pushed above $130 a barrel or so. The combination would mean a 20-25 per cent rise in the cost of the Indian basket. The cited rupee level and crude oil levels both look possible. If it does happen, and the government is forced to liberalise energy prices, there will probably be a big bounce in the energy-sector PSUs.
The author is a technical and equity analyst