Going short on OMC stocks could prove beneficial

There are many ways to assess the impact of West Asia North Africa (Wana) tensions on the energy market. But, they are all questions of degree. The best case scenarios assume the trouble won’t escalate and the global crude supply-demand situation that prevailed until December 2010 will resume. In that case, oil prices will rise relatively slowly, as the global economic growth improves.

In the worst case scenario, the Wana trouble spreads and huge supply disruptions occur over long periods. In that case, crude oil prices will skyrocket, while the global economy grinds to a halt on oil starvation. In the “most likely” scenario, there is more trouble and some supply disruption; oil exporters eventually sort out their problems and work out arrangements to continue exporting. In that case, too, crude oil prices will skyrocket and the global GDP will stutter. But things will settle down reasonably quickly.

There are many ways to model potential situations. Experts will be divided in their opinion. None of them will get all the details of what happens right. But all of them will factor rising crude oil prices into the visible future.

It is quite difficult to assess the dimensions of what could happen in India if crude prices rose quickly. The Indian crude basket moves in tandem with benchmark prices, though there is a small spread in India’s favour. Any rise means a negative impact on the trade balance.

Also, given the apparent determination of the Indian government to subsidise petroleum products, the fiscal deficit will expand. Finally, since the subsidies are insufficient, the finances of government-run refiners and marketers will be stressed anyway. Due to the existence of retail price controls, the efforts to build private petrol pump chains will stall again.

Put it all together and it is not a pretty picture. On the good side, this will mean investments flowing into exploration and production. It will also mean that private Indian refiners, who are extremely competitive on refining margins, could gain share in the export market. It should mean upgraded profit estimates for producers, though the market may look askance at ONGC and OIL being forced to share the subsidy burden.

The policy situation makes it murkier. If rising prices force the government to review the subsidy policy, good. But the government can be extremely unpredictable. One cannot set timeframes, nor can one set price levels. Wait and watch is the best one can say, with the caveat that review is unlikely before Assembly elections at the least.

The good news for a trader is that the majors are all available in the F&O segment. You could hold extended shorts on HPCL, BPCL and IOC, rolling over futures positions until such time, as and when, the government decides to review subsidy policy. Going long on Cairn, Reliance Industries, ONGC and OIL is a little more risky. When the market is in a skittish mood and generally gloomy, uptrends tend to be more difficult to sustain.

The author is a technical and equity analyst