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Crude Reality?

Speculative surge with no structural support, yet doesn't fail to fuel end-of-the-world worries for Indian macro!

Hedge funds are having a field day, perfect setting for them to spin off a speculative spike on the oil price.  All they need is some semblance of supply shock. It hardly matters for them that the shock is only for short-term or it is only from a marginal swing in supply. It doesn't even matter that there is an OPEC daddy who is sitting on tons of supply (currently on self-inflicted supply cut), waiting to pounce if the price point breaches certain level. The fact that the swing producers like shale gas sharks can unleash supply on short notice hasn't failed them from their ferocious attack on the fossil price. They know that they have enough financial ammunition to magnify minions into monsters - which is precisely what they have done with the marginal supply issues that have erupted from Iran sanctions, Venezuelan political hiccup and the temporary lull in shale gas drilling.

Speculative spook:
Hedge funds know that their luck wouldn't last long as it is difficult to build a long-term bull case for oil given the strong supply fundamentals and long-term demand uncertainty on emerging Electric and Hybrid technologies. While funds are having fun while it lasts, unwittingly they seem to have spooked markets like India which is heavily reliant on oil imports.

Last two weeks have been busy time for both financial and political commentators in India. They are busy in endless debates on how oil has roiled the markets or oil is increasingly foiling the future of this administration (Govt).  Take the case of rupee or yield and how they have

been spooked by this spoof. Look at how, with their spiced up spreadsheets, these financial commentators spruce up their (mis)projections on currency and interest rates to create a vicious scare on rupee and yield.  Persistent FII selling on emerging markets exit (on rising US Fed rates) couldn't have come at a worse time.

All of them know it is more of entertainment value than anything material as oil surge is more transient and less structural. But no harm in having fun while it lasts. But for one community, this entertainment is likely to be an enriching one. That is venerable value investing community. With spooked markets throwing significant value opportunities, they are on mission mode to cherry-pick stocks at salivating prices. Scare works in a strange way in stock markets. It doesn't shake the larger ones as much. But for small and midcaps, it is a different story. They get slaughtered mercilessly by this vicious scare of rising crude and falling currency. Though the Sensex looks deceptively steady, the broader small and midcaps are under severe strain, thus providing a great stock-picking opportunities for value investors.

In the last couple of days, crude has cooled a bit though, on the prospects of production hike from OPEC, rise in US inventories and jump in shale gas rig counts. This is not something unexpected, though hedge funds will use all their money muscle to keep the hysteria going. Only time will tell whether this fall in crude prices is temporary or a more sustainable one. It is anyone's guess how the price will swing in the short-term. That said, there is much less fundamental case for crude to be high in the medium to long-term.

Happy Value Investing!

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Aruna Giri

The author is Founder CEO & Fund Manager, TrustLine Holdings Pvt Ltd

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