Money Times: Fuel fuels a crisis

Recently, petrol pumps in North India displayed a scary poster. ‘No Diesel’ was what the petrol pumps announced for the whole day. And more recently, public sector oil refining and marketing companies slowed down the issue of new gas connections. Private sector refiners and marketers like Reliance Petroleum and Essar have shutdown their gas stations and are exporting both petrol and diesel to keep afloat. The story of kerosene, the poor man’s fuel, is no better as the public distribution system (PDS) has no stocks. Even in the open market at three times the PDS rate, this fuel is scarce. In case you think these are stray cases, think again and take a close look at the whole issue as the three major oil PSUs viz. IOL, BPCL and HPCL are looking at a collective loss of Rs.2,00,000 cr. in FY09. At this rate, how long can they survive the crunch?

It is just a book entry for the Finance Minister who will transfer this loss to the exchequer. And if he does so, the fiscal deficit would bloat to more than 5% of the GDP and ruin all his calculations. But turning a blind eye to the situation just to win votes will be suicidal for the ruling coalition particularly the Congress party.

A fuel shortage looms large and in a matter of a few days the oil marketing companies shall be broke and bankrupt after exhausting their borrowing limits of Rs.90,000 cr. Already, Rs.70,000 cr. of borrowings have been notched up and the saving grace is that they are government companies. By early June, each of these three companies will have no cash to run their business or even pay salaries. It’s only a matter of time before each of them sinks beyond a trace!
When crude oil is hovering around $135 and is likely to cross $150 a barrel, no global supplier will honour supply contracts unless the money is paid upfront. This means that the country may experience a situation of scarce fuel or just ‘no fuel’ in coming months. The rising crude prices and the depreciating rupee against the dollar are a dangerous combination for the government.

Although the government denies taking any drastic steps to curb fuel consumption, petrol & diesel rationing together with a sharp price rise is inevitable to stop matters from getting bad to worse. The political compulsions are running our economic balance and wiping out all the good work of the last few years.

By ignoring the economic realities when the world is on the brink of an unprecedented food & fuel crisis, which is as grave what the world faced during the world wars.

What does an investor do at such times? While the government may put up a brave front and say that this crisis, too, shall pass, the reality is that it may or it may not. The loud speaking politicians may be voted out of power but the large economic damage it will impart will last long and take years to heal. If it lasts longer, then no political play anywhere can save the world from this crisis.

Just hope and pray that the crude shock is in its last phase of an upswing and shall come down as quickly as it has risen. Till then, just book profits and keep liquidating your portfolio. In such times, ‘Cash is King’.

Stay away as sentiment turns negative

The markets displayed weakness on the back of the rising crude oil prices, which touched a historic high of $135. The spike in crude prices came on the back of weak US inventory data and OPEC’s statement about speculation in global markets. Traders and speculators were seen unwinding long positions and creating fresh short positions. Incidentally, FIIs remained net sellers in the cash as well as the derivatives segment. Mutual Funds, too, were net sellers exiting at higher levels to book profits.

The global cues have remained negative. Global markets reacted negatively to the rise in crude prices and the US economy continued to decimate weak economic signals. The Indian rupee continued to depreciate against the green buck, which is a double whammy for the Indian

economy in the rising crude oil scenario. The government has still not agreed to a hike fuel prices, which is a negative for oil marketing companies who are already in deep financial trouble. In fact, Indian Oil has sought shareholders’ permission to mortgage its assets for raising loans to keep the company going. The rupee is likely to depreciate further unless the RBI intervenes, which it is likely to do.

Now, it is important that global cues turn positive, especially the crude prices. It is important that institutions turn positive if we have to get out of this weakness. Stock specific activity will be witnessed amid intermediate bouts of volatility and choppiness. The market sentiment is likely to remain negative and every rise is likely to meet with selling pressure unless some positive news flow is witnessed.

On the upside, the Sensex faces resistance at the 17300 and 17600 levels but has support at the 16608 and 16372 levels. On the upside, the Nifty faces resistance at the 5025, and 5156 levels while 4899 and 4647 are its important support levels.
Investors are advised to stay away.