Macro headwinds continue to roil markets as rupee plunges to new low

India’s stock markets saw a fresh round of sell-offs on Wednesday after Brent crude prices climbed to a four-year high of $85 a barrel and the rupee dropped to a new low of 73.34 against the dollar.

Investors pulled out of equity markets on worries that the spike in oil prices and fall in the rupee would adversely impact the economy. Investor sentiment has already been fragile following defaults by Infrastructure Leasing & Financial Services (IL&FS), a lender to the infrastructure sector. The benchmark Sensex closed at 35,975.63, down 551 points, or 1.51 per cent, the most since March 16. The Nifty declined 150 points, or 1.36 per cent, to end at 10,858, a level last seen on July 9.

Brent crude prices were hovering above $85 a barrel — the most since November 2014 — on fears that the impending sanctions on Iran’s petroleum industry would lead to constricted supplies. Oil prices have gained 22 per cent since mid-August and are up more than 50 per cent in the past one year. The surge has come at a time when the dollar is gaining against most global currencies amid the US Federal Reserve embarking on monetary tightening.

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Modi has an oil price headache and Saudi Arabia may just make it worse

India’s Prime Minister Narendra Modi has an oil problem. And it’s set to worsen with Saudi Arabia rooting for the commodity to push through the $80 barrier.

Modi’s government made the most of cheap oil by substituting any fall in prices with taxes that kept retail fuel rates unchanged for consumers and boosted the federal revenue. Now, pressure is mounting to forego some of that windfall as pump prices of gasoline and diesel hit records, likely marring the ruling party’s prospects at the national ballot in 2019.

“There is a strong case for the central government to take another excise duty cut, and ask state governments to reduce value added tax,” Anil Sharma and Ravi Adukia, analysts at Nomura Financial Advisory and Securities India Pvt. wrote in a note Tuesday.

Fuel prices have started to pinch as Brent, the benchmark for more than half of the world’s oil, hit $80 a barrel last week. It’s still short of its all-time high of $147.50. But cutting local taxes, which account for more than half of the retail gasoline and diesel prices, would stretch government finances at a time when the subsidy burden on kerosene and cooking gas is climbing.

Oil prices jump after Saudi Arabia and Arab allies cut ties with Qatar

Saudi Arabia and key allies on Monday cut ties with Qatar, accusing it of supporting extremism, sending shockwaves through the energy industry as the countries involved include the world's top oil and liquefied natural gas (LNG) exporters.

Saudi Arabia, the world's biggest crude oil exporter, along with the United Arab Emirates, Egypt, and Bahrain said they would sever all ties including transport links with Qatar, the top LNG exporter in the world. The three Gulf countries said they will give Qatari visitors and residents two weeks to leave.

"(Qatar) embraces multiple terrorist and sectarian groups aimed at disturbing stability in the region, including the Muslim Brotherhood, ISIS (Islamic State) and al-Qaeda, and promotes the message and schemes of these groups through their media constantly," Saudi state news agency SPA said .

While the announcements did not immediately affect oil shipments, benchmark Brent crude futures prices rose over 1 percent to well over $50 per barrel following the news.

Meanwhile, Petronet LNG said on Monday it did not expect any impact on gas supplies from Qatar after Saudi Arabia, Egypt, the United Arab Emirates and Bahrain severed ties with the Gulf Arab state accusing it of supporting terrorism.

"I don't think there will be any impact on it. We get gas directly from Qatar by sea," R.K. Garg, head of finance at Petronet, told Reuters when asked to comment on the coordinated move to cut relations.Petronet LNG, India's biggest gas importer, buys 8.5 million tonnes a year of liquefied natural gas (LNG) from Qatar under a long-term contract. It also buys additional volumes from Qatar under spot deals.

The coordinated move dramatically escalates a dispute over Qatar's support of the Muslim Brotherhood, the world's oldest Islamist movement, and adds accusations that Doha even backs the agenda of regional arch-rival Iran.The three Gulf states announced the closure of transport ties with Qatar and gave Qatari visitors and residents two weeks to leave their countries. Qatar was also expelled from a Saudi-led coalition fighting in Yemen.
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Worries around OMCs appear to be overdone?

Stocks of oil marketing companies (OMCs) namely Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) have lagged the S&P BSE Sensex since December 9 as the Opec and non-Opec nations agreed to cut crude oil production by 1.2 million barrels of oil equivalent per day from January 1, 2017. These stocks have fallen anywhere between 2-6 per cent in this period versus a per cent fall in the Sensex. While crude oil prices have come off by 0.6 per cent to $53.25 a barrel in this period, most analysts expect this metric to surge going forward and touch $60 a barrel levels. Rising crude oil prices are negative for OMCs as they may not always be in a position to pass on this hike and it is also likely to result in higher working capital requirements. But the fears around these stocks could have been overdone.
Historical evidence suggests that the government has deployed excise duty as an efficient tool to reduce the burden of rising crude oil prices on both the OMCs as well as the end consumers. The trend is likely to continue this time around as well, estimate analysts. "We believe at $60 a barrel, excise duty rollbacks are likely, and possibly VAT cuts too. These cuts would be structurally positive for OMCs and reduce the risk of adverse marketing margins," says Sabri Hazarika of PhillipCapital. Though the jury is out on whether the government would bear the entire burden of oil price increase, even a partial support on this front would aid OMCs (read more).