The world faced an oil price bubble in July 2008 when crude price hit an all-time high of $147 or Rs6,333. While the dollar price of oil is about 33% lower than that now, the Indian price has breached the all-time high. This is because of the massive devaluation of the India rupee, which reflects, among things, the massive loot and inefficiency by a regime led by a trained economist, Dr Manmohan Singh
A few days ago, crude oil price quoted on the MCX surpassed the all-time high price of Rs6,333, made in July 2008. How? The culprit is a weak rupee which has made oil as expensive as it was when international oil price was about 50% higher. At that time in 2008 the world was in the grip of the fear of a runaway rise in the price of oil. Global oil prices went parabolic as speculators and large institutions pushed up the price backed by the idea that the world was running out of oil. “Peak oil” theory was a rage. Oil hit an all-time high of $147 in July. Goldman Sachs had announced that the $200 barrier could be hit any time and even the president of the OPEC (Organization of Petroleum Exporting Countries) had warned of oil reaching $200 a barrel.
Well, we are not hearing much of the peak oil theory any more. That is because crude oil is just around $103 now, rising recently after trading around $95 for a long time. But if you look at the Indian imported oil price, you would wonder whether we are re-living the worry of peak oil.
The rupee has been weak for a long time but has cascaded down in the last two months, pushing up oil prices in rupee terms to all-time highs. While the rupee has depreciated against the US dollar by over 12% since the beginning of May to an all-time low of Rs61.21, over the same period price of crude oil has moved up 29% from Rs4,936 per barrel (bbl) to Rs6,389/Bbl as on 8 July 2013. In dollar terms the price of crude oil is up by just 8% from $95.61 in May 2013 to $103.
Crude oil in dollar and rupee terms moved almost in sync from the beginning of 2007 up to September 2011. Then, the decline of the rupee started and there was the expanding gap between the price of crude oil in dollars and in rupees. From around Rs45/$ in September 2011 the rupee declined by 15% to Rs53/$. While the crude oil price in dollar terms moved up by 17%, its price in rupee jumped by 29%. After a slight strengthening of the rupee, over the next couple of months, the rupee continued its downward trend. Since the beginning of this year, the price of crude oil has climbed up by 24% in rupee terms and a much lower 11% in dollar terms. The rupee has depreciated by almost 10% over this period.
So, India is again paying the same price of oil when there was an oil bubble. The hope for a stronger rupee seems bleak given the weak economic fundamentals, costlier imports, high inflation and record high current account deficit (CAD).
The rupee has been weak because the Indian economy has become weak and uncompetitive under the Congress-led UPA government and too dependent on foreign portfolio inflows into stock and bond markets to fund the current account deficit. And now, the foreigners are exiting the bond market, putting pressure on the rupee. In June 2013 foreign institutional investors (FII) pulled out Rs22,000 crore from the debt market. This is a staggering amount, because as much as 12% of total FII investment in the Indian debt market flew out in a span of 21 days.
The government has been trying to gain the confidence of investors saying that the drop in the currency is a temporary phenomenon and most emerging countries are affected. Finance minister P Chidambaram is in the US to drive foreign direct investment especially in the infrastructure sector. We have seen this happen in the past, would foreign investor bite again? Please read Deformed Reforms of the UPA government.
The better than expected US economic data and the view that the Federal Reserve would be winding down its monetary stimulus has sparked a dollar rally. The dollar also rose amid new signs the US housing recovery is improving. This has also led to a huge sell-off in emerging markets including India.
The falling rupee and the rising price of crude oil in dollar terms have acted like a double whammy for the Indian economy. US crude oil futures hit a 14-month high, jumping by more than $1.98/BBL to close at $103.22 on a better-than-expected US jobs report and concern about escalating unrest in Syria will spread to other parts of the Middle East and disrupt supplies.
In a renewed effort to fire up the infrastructure sector, the prime minister recently announced plans to award mega projects worth Rs1.15 trillion (around $19 billion) through the PPP model by the end of FY14
With the exception of Gujarat Pipavav Port and L&T to an extent, Nomura Equity Research expects 1QFY14F to be a disappointing quarter for the sector. While GPPV will benefit from a low base last year (the loss of Maersk line to Mundra), L&T will likely benefit from strong order flow growth momentum. Cummins India is likely to report flattish trends despite building in some benefit from currency tailwinds. Crompton Greaves remains a wildcard as quarterly expectations tend to get postponed to the next quarter. Nomura does not rule out a positive surprise from Crompton Greaves, as the stock has already bounced from recent lows and Nomura awaits a fundamental business turnaround for being positive on the stock.
In a renewed effort to fire up the infrastructure sector, the prime minister recently announced plans to award mega projects worth Rs1.15 trillion (around $19 billion) through the PPP (public-private-partnership) model by the end of FY14. Key projects include the Rs300 billion of Mumbai elevated rail corridor, Rs400 billion worth power projects and Rs250 billion worth port projects.
L&T intends to enter the European offshore wind sector by utilising its fabrication yards in the hydrocarbons business. Its upstream division already manufactures and installs jackets for oil and gas platforms. With three jacket-fabrication yards in India and Oman and a production capacity of 150,000 tonnes per year, its specialty in offshore design and projects could have vast applications in the offshore wind sector, believes Nomura.
As per a Reuters report, Oman has awarded L&T a contract worth Rial135.6 million ($352 million) for the Batinah road project package 4. L&T is L1 in another three road projects in the Middle East for a total of Rs70 billion including this package.
L&T has announced new orders worth Rs40.57 billion across various business segments, of which Building & Factories were at Rs18.08 billion, Hydrocarbons Rs10 billion, Water & Renewable Energy Rs6.28 billion and the rest spread out between Power T&D and Material Handling.
In a major win for the company, Thermax has announced an Rs17 billion order for design, manufacture and commissioning of nine CBFC high pressure boilers of 500 TPH from a leading petrochemical company.
Law ministry does a U-turn on rescheduling of highway developers’ premium. Earlier, it had said that such a proposal is legally unsustainable. However, it has supposedly asked the finance ministry to look into the issue.