Ripple effect of Oil Crisis:

In life, we take many things for granted. For instance – water resource. We make a borewell and keep consuming it and sometimes wasting it. Only when the supply gets disrupted, we understand its value. We scramble to get things done – like ‘buying’ water at a cost.

Right now, the ongoing Oil Crisis is one such disruption. When unprecedent things happen, when things go out of control, and when things may take years to normalize – we understand our limitations. That exposes the fragility of economy.

While most of us may be aware of the way the US-Iran war unfolded, following is a simple flow of events to understand the ripple effect:

·       28^th Feb 2026 : US-Israel launch: Operation EPIC FURY, killing Iran’s supreme leader  Ali Khamenei, many of his family members and senior officials of the regime.

·       Iran's response was calculated. Rather than engage in a conventional war it could not win, Tehran weaponised geography. It deployed drones, missiles, and naval mines to seal the Strait of Hormuz, and then it began hitting energy infrastructure across the Gulf.

·       Within the first week, Iran’s drones struck Qatar's Ras Laffan LNG facility- responsible for nearly 20 percent of the world's liquefied natural gas exports. Saudi Arabia's Ras Tanura refinery, the kingdom's largest, was closed after a fire caused by intercepted drone debris. The UAE's ADNOC shut refineries. Kuwait Petroleum Corporation and Bahrain's Bapco followed. Gulf countries have been forced to cut at least 10 million barrels per day of production.

·       On 18^th March, Israel hit Iran's South Pars gas field - the single largest natural gas deposit on earth, shared between Iran and Qatar. Iran retaliated within hours, launching missiles at Qatar's Ras Laffan again, causing what QatarEnergy described as extensive damage. Iran also targeted UAE’s Habshan gas complex, the Bab oilfield, LNG facilities in Kuwait, Bahrain and Saudi.

·       In total, six countries in the Gulf have now had their energy infrastructure directly attacked or shut down: Iran, Qatar, Saudi Arabia, the UAE, Kuwait, and Bahrain.

·       Strait of Hormuz: Before 28^th Feb, 100 oil tankers crossed every day. In past 3 weeks a total of 21 tankers have managed to cross.

Global impact:

·       World consumes about 105 million barrels per day.
·       As a result of war, Oil supply has fallen by 8 million barrels per day. That 7.5%.
·       So far, Asian LNG spot prices more than doubled to over 25 dollars per million BTU. European natural gas futures rose over 50 percent. Jet fuel prices are up 83 percent, according to the International Air Transport Association. Urea fertiliser prices have risen 35 percent. Helium, essential for semiconductor manufacturing, has doubled in price since Qatar, the source of a third of the world's helium supply, shut production.
·       More than 30 countries are affected. South Korea imposed fuel caps for the first time in nearly three decades. Japan began releasing oil from its national reserves. Bangladesh stationed troops at oil depots and closed universities to conserve fuel. The Philippines moved government offices to a four-day work week. Nepal started rationing cooking gas. Vietnam has less than 20 days of oil reserves remaining. Thailand's tourist arrivals fell 9 percent in the first week of March alone, with hotels reporting occupancy as low as 10 percent. Smaller energy importing economies, including the Philippines, Pakistan, and Sri Lanka, would face the sharpest macroeconomic damage, as inflation, currency depreciation, and widening deficits hit all at once.

Impact on India:

·       India imports 90% of its Crude oil.
·       50% of this and 75% of LNG pass through strait of Hormuz.
·        22 Indian flagged vessels carrying 2.2 million metric tonnes of critical energy cargo, including LPG, LNG, and crude oil, were stranded in the strait as of 18 March. Only two vessels each carrying 46,000 metric tonnes of LNG managed to reach India - that too in exchange of emergency medicines etc.
·       With rising crude price, our current account deficit spirals up. A US$1 rise in crude oil prices increases India’s annual import bill by approximately US$1.5 billion to US$2 billion (approx. ₹12,000–₹16,000 crore). This boosts the Current Account Deficit (CAD), fuels inflation, weakens the Rupee, and negatively impacts downstream oil marketing companies.
·       Agricultural exports to Gulf countries, including rice and bananas, have been severely disrupted.
·       Around 93 lakh Indians work in the Middle East, and 30 percent of India's total remittances (over 50 billion dollars annually) flows from the region.

What Next ? :

With majority of IRAN’s top brass wiped out, many expect the war to come to an end soon. But life will not be the same again.
·       There could be sporadic instances of terror threats / attacks across the globe – increasing the cost of defense and security checks. This could affect normalcy.
·       Oil and LNG production may not resume immediately. It depends on field's age and the nature of the shutdown. LNG facilities involve sub-zero cryogenic equipment that must be restarted gradually to avoid thermal shock and damage.
In 1973, the Arab oil embargo was a political tool that could be lifted with a political decision. In 2026, even after a ceasefire, the physical, financial, and logistical wreckage will take far longer to clear.

What the US thought could be a cake walk like the way they handled Venezuelan crisis could turn out to be a costly affair – affecting not just them, but the entire world. They would not have imagined the kind of retaliation from Iran. They would not have imagined that their key NATO allies not aligning with them. And worse what should have been a Israel-Iran war has turned out to be a Arab-Iran war. As Saudi Arabia's foreign minister said on 19 March: the trust that held the Gulf's energy system together has been completely shattered. The ripple effect could take longer than you imagine to normalize. And what was taken for granted - be it oil or peace - has become a luxury now.

Predictable Markets

 Volatility is the inherent nature of stock market - whether we like it or not. But the kind of swings we are witnessing in 2022 could embolden any investor to venture into stock market investing.

Markets had given major 'entry' and 'exit' opportunity not once or twice... but thrice in past one year. Anyone who made use of these swings would have made decent money. The last (ongoing) swing from lows of 51360 in sensex on 17th June 2022 to  61795 on 11th Nov 2022 translates to a 20% absolute returns.

In hindsight it look easier to Buy Low and Sell High. But in reality each fall comes wish lots of negative news and each rise comes with host of positive news. A typical investor remains positive and optimistic when these negative news are floating around and remains negative when positive news gets built up. As a result precise entry-exit is easier said than done.

Many investors - particularly the new age / new generation investors - find this 'predictability' interesting and impressive. It has made them believe that making money is easy in stock market. As a result many got lured to equity investing - by opening record number of demat accounts in past two years. But in reality such 'V' shaped recovery - which typically happens over short term- could spoil the true sprit of equity investing. Infact, it has set the expectations wrong among budding investors.

Many of them have not seen bear markets which have lasted for more than 2 years - like in 2001- 2004 Tech bubble / WTC Collapse or Global Financial Crisis in 2007- 2009. The drawdown in each of these factors have been for more than 50%!.

While geopolical risks are common and has been happening every alternate hear, the debt market bubble and higher inflation are rare occurrences. Infact since 1790 - the debt market crisis has happened only 4 times in the past and each one has been followed by a long recession. According to Mr. Ray Dalio, American Hedge fund manager and author of 'Changing World Order, we are starring at the 4th such drawdown now. 

Infact, when debt markets collapse, there would be sell off's across asset classes - be it equity, debt etc. The only safe haven could be physical assets like real estate and precious metals like Gold.

While we try to learn from history and avoid disasters, it is the over reaction that creates newer problems. As a result, it is always wiser for investors to remain cautious and not put all eggs in one basket. It is like a musical chair - no one knows when the music will stop. Having an asset allocation across assets could be the best way to ride the tide - cautiously.

Market Update : dated 16-Sept-2012 : Bounce Back

Sent: Sunday, September 16, 2012 11:09 PM

Subject: Market Update : Bounce Back : Week ended 15-Sept-2012

Dear Sir,

Greetings from EASY Investments.

We hope you saw our previous email on “Market update: Roller Coaster Ride dated 6^th Sept 2012”. We mentioned that this Government (Govt) has hardly got 5 months to deliver. And we ended the mail as “Be it MOST-STP (or) MOST-VIP (or) plain adhoc investment - investors need to make use of the current pessimism. Though many of the investments made in the past have been languishing, valuations are at very attractive rates. Current Price Earning ratio of index is 13, when compared to average of 18. No doubt - volatality is bound to persist. With suitable investment strategy, you can beat the actual index and get maximum benefit. ”

The message was clear. But did you act on it - it is time to ask yourself.

Meanwhile, following events ( some of them indicated in our previous email ) triggered the market which rallied by solid 781 points (4.4%) to close at 18464 on Friday the 14^th of Sept 2012. And many stocks gained any where between 5 % to 20%. List of these weekly gainers are attached for your kind information.

·         With Coal Scam hitting the parliament badly, Govt seems to have done their home work carefully and restrategized their approach. They lined up a series of announcements / events which one after another would baffle the opposition. At the end, even if they get through 50% of what they proposed – they have made a progress.

·        The tone for rally was set on Wednesday (12/09/12) morning when the Industrial productivity IPP data was released as 0.1% Vs (-1.8%) in previous quarter. Arguably, it means we have not grown instead of negative growth. But this was perceived as first positive message.

·         Following this was the long pending agenda of fuel price hike. Govt preferred to time this announcement after market hours on Wednesday. Price of ‘general’ diesel was hiked by Rs.5+ (12% hike) and the subsidized gas per connection of LPG was restricted to 6 per annum. And the beauty is the price of ‘premium’ petrol (+Rs.6) and ‘premium’ diesel (+Rs.16) were hike steeply many did not take note of it. But Govt has clearly played this game well. Even if they have to compromise on diesel hike – say by revising the hike to Rs.3 or so, they may get through with the LPG Subsidy revision and the price of premium petrol/diesel.

·         Meantime International news trickled in: with US FED coming out with ‘unlimited’ buy back option of bonds to strengthen their economy. In the views of analyst – this QE3 was much bigger than earlier 2 QE’s which were announced during Lehman crisis and subsequently. This infused huge cash in the market. This was on  Thursday night.

·         Obviously Friday’s market opened by solid 400 points plus on BSE (up by 2%+). Then came the inflation data which was not great. Inflation inched up to 7.55% Vs 6.87% last month. Logically market should have reacted to it – but market maintained its lead and BSE closed up by 443 points .

·        Then came the big-bang announcements on Friday evening: Allowing 51% FDI in retail, 49% FDI in Civil Aviation, 49% FDI in power exchanges, 74% FDI in broadcasting sector, disinvestment in four PSU companies – Hind Copper, Oil India, MMTC and Nalco.

·         The so far docile, policy paralyzed Government all of a sudden gave series of booster dose to revive the economy. With genuine intention to reduce the fiscal deficit and keeping the reforms agenda, industrialist / economist and stock markets cheered alike.

·         On Monday, RBI’s interest rate policy has been lined up. If there is a rate cut, then market is likely to fire up further.

And the logical outcome of these events are:

·        After a long gap, it has been a sigh of relief for the industries. As Prime Minister quoted “It takes courage and Some risk to break policy logjam.”

·        Opposition and Allies are taken aback by the new found zeal. Now each one of them will be busy objecting to one announcement or other – but never together. That is a clear game of ‘Divide and Rule’.

·         And the prime minister is now busy in Cabinet shuffle. It is clearly mentioned that some of the allies are likely to get ministerial berth. That is a strategic way of keeping the allies happy, keeping the government stable and push across with reforms.

·         Hike in fuel price and rationalization in Gas subsidy was need of the hour. This could address the swelling gap in subsidy bill.

·         No doubt FDI in Aviation is the need of the hour to save an ailing industry.

·         FDI in Retail – though debatable – has been on expected lines. And the beauty is, state governments will take final call on weather to allow FDI in retail in their states or not. This is like shooting the ball to your court. Opposition or allies who are against FDI in retail have the option to deny such stores in their state.   

·         Disinvestment – in the four companies mentioned above to bring in about Rs.15000 Cr to the Govt.

·         As mentioned in our earlier mails, revival of monsoon would result in fall in inflation.

·         Tough everything looks rosy- it may not be a cake walk for the Coalition Government. There is a remote chance that some of the ‘adamant’ allies pull down the government – but cannot be ruled out.

·         Wheather all these actions / announcements / likely oppositions would really help in changing the perception on India in the view of rating agency is yet to be seen. If policies are not implemented, then they may go ahead with downgrade which could negatively surprise Indian economy and the stock market.

If the policy makers could negotiate on some reforms and yet push through, then it would be a huge victory. And in Investment, the most important but ignored fact is EXIT : Exiting an investment is much more important than making an investment. 

As one investor called me last week to complain that his investment in shares have hardly delivered 10% returns over past two years, I had to clarify that in the past two days these stocks could have delivered 10%. That is the power of stock market. All you need is patience to make that return.  

Market Update : dated 6th Sept 2012 : Roller Coaster Ride

We communicate on logical outcome of the market news by email to our clients. Some of the recepients, requested us to publish these email content so that the wider investing community could benefit. Here are the last two emails. We hope the investors find these brief, down to ground analysis - easy to understand. Do make your comments in the comments box below this article.

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----- Original Message -----

From: easy

Sent: Thursday, September 06, 2012 9:10 AM

Subject: Market Update : Roller Coaster Ride : Take 2 minutes to read this mail

Dear Sir,

Greetings from EASY Investments.

One look at the attached graph would clearly show the roller-coater ride of the indian stock market.

Inspite of the huge up's and down's in the market, markets have remained where they were.

In other words markets have been in a range - they didnot crash or rally.

In the last six months we had few changes in the government :

• One major decision being the new finance minister. After taking charge, he was expected to do some magic to revive the ailing economy. But given the limitations, Fin Min has not made any major announcement. He is busy releasing media news - which has its own limited impact with Foreign investors returning back and investing in indian equities.
• Monsoon - though late - has revived in many parts of india. Though we might not have got normal monsoon, we definitely donot have a drough - as feared earlier. This is a major positive for the economy.
• Left with no other options, government is bound to hike the price of fuel - be it petrol / diesel / kerosen / LPG. Though this may trigger inflation in short run, the reduction in fiscal deficit is likely to be positive for economy. According to BPCL, the extent of loss for selling a liter of diesel is Rs.17, petrol is Rs.5, Kerosen is Rs.32 and LPG is Rs.347. All these subsidies are reflected in widening fiscal deficit
• And there are host of reforms - like banking reforms, real estate reforms, pension reforms, insurance reforms, FDI in retail etc. which needs to be presented, debated and approved by parliment
• But the government is busy fire fighting - the latest one being Coal-gate scam.
• RBI is quiet firm and clear that inflation has to come down for them to reduce interest rates. With monsoon revival and stable international oil price, RBI may reduce interest rates in next 3 months to 6 months.
• And this finance minister has got hardly 5 months to carry on some reforms. Feb 2013 would be the last budget of this government. Though elections are only in May 2014, there will be no budget in Feb 2014 due to election code of conduct. Hence Feb 2013 budget will be election oriented, populistic budget with minimal importance for reforms.
• In April 2012, S&P Rating agency of USA downgraded India from "Stable" Rating to "Negative" rating. Way back in June 2012, S&P had warned that if India doesnot address critical issues like fiscal deficit, then India's rating may be revised to "Junk" status. Which means, India would lose its Investment grade. With lack of political will and very slow implementation of policies, this downgrade seems very much likely which may result in panic and chaos in the investment market.

Given these mix bag of positive and negative news, market is likely to remain highly volatile - reacting heavily to local and international news. Though the attached graph may indicate that market remained in a narrow range, volatality has still been there. Making use of this volatality is investors big opportunity.

• Ideally you can review your existing investments - be it shares or mutual funds. You can weed out unwanted / idle / unsuitable investments and change them to good ones you own. We @ EASY Investments can help in reviewing your existing investments.
• For those investors who wish to maximise on this volatile market conditions - you can consider investing in phased manner and book profits in phased manner. This is an investment strategy called MOST-STP, where STP stands for Short Term Profits.
• For those investors who wish to accumulate a stock, we have a structured investment method called MOST-VIP. Quiet interesting strategy wherein we assist you in buying a particular share as the price keeps falling. This strategy is particularly suitable for those investors who wish to invest sizable funds in a stock of their choice.
• Investors might think that mutual funds are performing as badly as stock market. That is not the case. In the past 6 months, when sensex has given NIL returns, funds like Reliance Equity Opportunities Fund, IDFC Sterling Equity Fund, Sundaram Select Midcap Fund, ICICI Pru Discovery mutual fund have delivered close to 12% absolute return. All credits to these fund managers. Ideally you can include these funds in you portfolio.
• We have published few informative articles, which could be read by clicking the links below:
  • Good Stocks to invest in Tough Markets : http://easyinv.blogspot.in/2012/08/good-stocks-for-tough-times.html
  • Why does it make sense to book profits : http://easyinv.blogspot.in/2012/08/why-does-it-make-sense-to-book-profit.html
• Apart from that we have lots of Non Convertible Debentures at attractive interest rates. Part of your investment can be made in some of these NCD's
  • Shriram Citi Union Finance NCD offer 11.5% for 3 years and 11.75% FOR 5 Years. This NCD opening on 12th September can be considered for investments.
  • India Infoline NCD offering 12.75%. We donot have a view on this NCD. But it is available in the IPO market for investments and we can service you in these investments.

Be it MOST-STP (or) MOST-VIP (or) plain adhoc investment - investors need to make use of the current pessimism. Though many of the investments made in the past have been languishing, valuations are at very attractive rates. Current Price Earning ratio of index is 13, when compared to average of 18. No doubt - volatality is bound to persist. With suitable investment strategy, you can beat the actual index and get maximum benefit.

Do call us to discuss and take sensible investment decisions.

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