Sunday, September 24, 2023

Welcome to The Weekly, where our team shares a few thoughts to take you into the week. This week’s thoughts have been brought to you by Sagar Lele, Founder of Rupeeting. He also manages the All-Weather portfolios.

What’s Fuelling Oil Prices? 🛢️

The price of crude oil has gone up from US$ 73 in mid-June to just over US$ 94 now. Now every time this happens, alarm bells ring louder than for skyrocketing tomato and onion prices. After all, India imports 80% of its oil needs, and even the slightest rise can hurt the country’s finances.

Why are prices rising?

There are a couple of short term factors that seem to be resulting in the rise in oil prices, including:

1. Inflation coming under control, and central banks pausing rate hikes have been resulting in expectations of a soft landing, which essentially says ‘things are not so bad’ - resulting in a better economic outlook, which means more demand, and hence more buoyant oil prices
2. After getting spoilt by ridiculously high oil prices through 2021 and 2022, oil producing economies have been trying to keep prices high by cutting supply - low supply = higher prices

And there’s a slightly longer term problem, which doesn’t give so much comfort, and is indicative of higher prices sustaining for slightly longer.

Over the last decade, global awareness on climate change, and a hefty push towards renewables has channeled investments into greener alternatives. As a result of this, there has been significant underinvestment in exploration, infrastructure and capacity building in traditional energy sources like coal and oil.

But the harsh reality is that despite the exponential growth in renewable energy, it makes up for just a fraction of the global energy mix, and the world still needs oil. And underinvestment in the sector, coupled with inefficiencies resulting out of an ageing of the current infrastructure has only contributed to the current rise in prices.

Oil prices might just sustain at higher levels given a better global recovery and a comeback in China, till investments and supply issues catch up with growing demand.

What does it mean for India?

India’s import dependence doesn’t make things easier. While the government has been ambitious on improving the mix, and stuff like ethanol blending acts towards easing pressure, there is no easy way on short-term pressures created by high oil prices.

The Finance Ministry doesn’t seem too worried though, and reckons inflation will continue easing. The pressure from rising crude prices is expected to somewhat be nullified by easing food inflation, which probably peaked out in July this year.

What about the markets?

The markets have been under pressure ever since high inflation came back into the picture. High inflation has resulted in anxiety around the sustenance of RBI’s status quo on rate hikes. If inflation does continue to remain high, the RBI might just be pushed towards hiking rates, which is bad news for the markets.

The markets seem to be at a place where valuations are super high. And high valuations always stand at the risk of coming off at even the slightest shake. The markets can be expected to remain vulnerable till the time there is some ease seen on inflation data.