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This is personal. I was readying a piece (in my mind, of course) on how FMCG stocks could be headed for a re-rating due to a sharp fall in input costs. But along comes OPEC+ pouring cold water on it. Not only does it upend calculations of India Inc's chief financial officers and pose a risk to India’s relatively bright economic outlook, but it also leaves one a topic short for the week.
OPEC+ surprised global markets over the weekend with a further sharp cut in output, by about 1.16 million barrels per day, taking the total cuts to 3.66 mn bpd, according to Reuters. What’s surprising is that these cuts came about even as international oil prices had already recovered from their low levels. Brent crude had touched a low of $73 a barrel in mid-March 2023, but had ended last week at $80 levels. Monday has seen it reach a high of $85 a barrel and then trade slightly lower at $83.5 a barrel at 11.15 am.
The move is obviously one that is designed to take up oil prices. Saudi Arabia said it was a precautionary move to support the oil market. The cuts will begin from May with the major cuts coming from Saudi Arabia with a cut of 500,000 bpd, Iraq with 211,000 bpd and the UAE with 144,000 bpd. Russia will extend its voluntary cut of 500,000 bpd till the end of May.
While oil prices were already rising in recent weeks, Goldman Sachs is expecting it to keep rising and has revised upwards its December 2023 estimate to $95 a barrel from its earlier level of $90 and its December 2024 forecast also upwards by $5 to $100 a barrel. Of course, volatile markets have made short work of long-term forecasts. Shishir Asthana writes in today’s edition that oil falling to as low as $65 a barrel and near record high short sellers in the market may have also prompted OPEC+’s move. It’s too soon to say if the current rally sets the stage for a long period of high oil prices, but if short sellers rush to unwind their positions, a near-term rally is assured.
This complicates matters on several fronts. India is better placed because it has been importing a bigger share of its oil imports from Russia, nearly one-third of all imports in February, ostensibly at attractive rates. Even then, its costs are likely to increase in relative terms. And, anyway, the remaining two-thirds that it imports will face inflation. This poses a risk for India on the current account deficit front, which had brought good news as it had fallen sharply in the October-December quarter. An upward move in oil prices poses a risk. A Reuters report quoted analysts as saying the production cuts could add $10 a barrel to current oil prices. Incidentally, an increase of this magnitude is estimated to add about 40 basis points to India’s current account deficit, according to an ICRA calculation .
It brings back the risk of higher oil prices feeding into a generalised increase in inflation across industries. FMCG companies had begun cutting product prices in response to falling crude oil and palm oil prices, but may now be forced to wait and watch. Palm oil prices too are likely to increase in line with the increase in crude oil prices, as could other oils used to make biofuels.
In short, the OPEC+ move complicates the relatively benign inflationary picture that the Street had been using as a backdrop, to make its estimates on which way equities or even interest rates are headed. The OPEC+ move also comes in time, or untimely as bulls may say, for the Monetary Policy Committee’ deliberations scheduled this week. MPC members anyway have to contend with India’s March PMI coming in hot, we write in today’s edition, as it accelerated to 56.4 from 55.3 in February. A strong manufacturing outlook and hotter oil prices don't make a good combination for those arguing for a pause in rate cuts.
Investing insights from our research team
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Technical Picks: Natural gas, USD-INR, PEL, Reliance and JSW Steel (These are published every trading day before markets open and can be read on the app).
Ravi Ananthanarayanan Moneycontrol Pro
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