Moneycontrol Pro Panorama | Oil is bubbling, but the Street has other worries

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Predictions of Russia attacking Ukraine on February 16, 2022 were proved wrong. Rather than attack its neighbour, Russia has decided to withdraw some of its troops but continues to maintain a significant presence. The markets welcomed the move. Equity markets recovered while oil and gold fell after the announcement of withdrawal was made public.

Though Brent oil has corrected from $96 a barrel to $92, analysts are expecting oil prices to cross $100 per barrel. It is only a matter of time.

Their certainty has more to do with supply-side issues rather than a demand pull. As countries limp their way out of the impact of COVID-19, the oil cartel represented by OPEC+ nations is struggling to meet the surge in oil demand.

Data shows that most nations in the cartel have not been meeting their prescribed quota because they no longer have the capacity to do so. Apart from Saudi Arabia, United Arab Emirates and Russia, all other countries are pumping below their required level.

The total spare capacity of OPEC+ nations has come down from 9 million barrels per day in the March quarter of 2021 to only 4 million barrels per day currently. The bigger problem is that an increase is in capacity is nowhere on the horizon. Most OPEC+ countries are struggling to make their ends meet and do not have the funds needed to invest in exploration and production (E&P).

Oil giants are unwilling to invest heavily in E&P activities, especially after the International Energy Agency (IEA) asked oil producers not to make new investments in its aim to make the industry Net Zero in carbon emission. Bankers are also shying away from lending to oil companies globally as they feel the rapid growth of alternative energy will impact these long-term investments.

In the US, shareholders are preventing companies from increasing production due to fears of oil prices crashing and companies posting losses or filing for bankruptcy, just as they did during the pandemic.

In such a scenario, oil at $100 a barrel is a given as economies pick up speed.

How will markets perform if oil prices rise?

Historically, oil prices have had little effect on the market. In fact, rising oil prices have always resulted in other markets, including equities, commodities and gold rising in tandem. Short duration wars, which is how wars are fought these days, have also had little impact on markets. Even the Gulf war, the biggest since the World Wars, has been positive for markets.

The disconnect between oil prices and the broad indices is increasing. Most indices, including the Sensex and the Nifty, have more stocks belonging to the services sector like IT and financials. The IT sector has seen increased business activity during higher oil prices as companies increase spending during this period.

The commodities sector, especially metal producers, are hit due to higher input prices, but they pass on these costs to their end consumers.

As far as equity markets are concerned, it’s not the oil price but the US Fed that is the villain in the room. The rate at which the Fed increases interest rates will decide the future trend of the market. The later they delay the inevitable, the bigger will be the impact. A sharp increase in interest rates accompanied by quantitative tightening could see equities bear the brunt of these actions. In comparison, the Russia-Ukraine crisis would appear to be a diversion, with a short term and lesser impact on the market.

Investing insights from our research team include:

How SpiceJet turned a surprise profit after a string of losses

Two stocks to play the robust inflows in equity mutual funds

Is the time right to look at RateGain?

Berger Paints: With recovery gaining ground, should you buy it?

IPCA Labs: Does return of pre-COVID expenses derail investment case?

What else are we reading?

Latest revelations cast a shadow over NSE’s listing plans

Crypto Learn | How staking, swapping, farming can add to crypto earnings

Is the rally in gold prices sustainable?

Interview | Hero Electric MD Naveen Munjal breaks down the way ahead for electric two-wheeler industry, its growth prospects

Tata Chemicals should make the most of the spurt in soda ash prices

Emerging markets: all risk and few rewards? (republished from the FT)

Assembly Elections | AAP puts spotlight on youth

Technical picks: Godrej Properties, Kotak Mahindra Bank, Poonawala Fincorp, and Bandhan Bank (These are published every trading day before markets open and can be read on the app)

Shishir Asthana
Moneycontrol Pro