Dollar Appreciating!

USD appreciated sharply against Euro by 1% in 2 days (its best in last seven months) signaling strengthening of USD in context of the recent geo-political situation   

Many things favoured this appreciation of USD of which three are more pertinent - 

• one reversal of penal tariffs by Supreme Courts of US which lead to some stability in trade
• second return of safe haven status to USD aftermath of recent geo-political stress especially conflict in Iran and 
• third with oil prices shooting up due to conflict, US will be mainly insulated as they have local supplies of oil but Euro zone will have to bear the brunt of price increases which means inflation and depreciation of their currency leading to strengthening of USD.

Question : Is this appreciation of USD sustainable, to me it seems to be yes considering the tensions and oil price jumps anticipated.  But let us keep our fingers crossed and wait

  

Oil Economics

Oil is dropping fast and WTI crude is currently trading at $103 per barrel levels.  What caused this change?  Is India buying more oil from Russia?  The answer will be on the affirmative, India is buying more oil from Russia in 2022 as there are deep discounts offered by Russia.  Commodity data from Kpler states that India imported more than 60 million barrels from Russia till now in 2022 compared to 12 million barrels in 2021.  

To facilitate this purchase Indian banks will likely be joining hands with Russian banks who are not hit by sanctions to facilitate payment for purchases of oil from Russia in Indian Rupees.  Setting up of payment mechanism is underway.

With China also buying higher volumes of oil from Russia global oil prices will be under stress and will drop further.

Balancing Act

Russian invasion of Ukraine has sent stock markets on a spin across the world and Sensex is no exception to it.  Compared to 23rd of February, Sensex is down by 5%.

There are indications that stock markets across the world will continue to be under strain as invasion of Ukraine does not seem to end soon.  Also as a consequence of this oil price is spinning out of control and currently trading at around $ 113 per barrel (29% increase since 23rd of February) which in turns puts in a big pressure on margin of corporate's which in turn affects the stock markets significantly.

Drop in stock markets and with oil prices not helping it either there is severe under current for all investors who are losing quite a lot of money on the markets.   This is where the balancing act has to come into play. 

Considered as one of the safe investments during crises gold has always traditionally played a pivotal role for investors.  Gold since 23rd February has increased by 4%.

Investors in gold have gained during the period when Sensex & Oil are wrecking havoc.

This trend helps us to understand the basic principle of balancing portfolio of investment.  It is not wise as an investor to have one type of investment it is advisable to spread portfolio.  It is always recommended to have gold around 20% to 30% in one's portfolio to have a balanced return.

Oil Price & Inflation in India

2021 has seen a big recovery in international oil prices by as high as 47% from $ 48.86 on 1.1.21 per barrel to $ 71.81 per barrel on 15.6.21.   This levels of $ 70+ were seen last only in late 2018.  Oil is at a 2.5 year high currently.  

This meteoric rise in oil prices is attributed to global economic recovery which fuels higher oil demand.  This economic recovery is attributed to high levels of vaccination in many developed countries.  With this price increase OPEC countries will be happy and there is scope for increase in production which may slightly reduce increases, but short term outlook for oil is bullish and it may go up further.   

Challenge for India will be already high oil prices due to high levels of taxes on oil will further push oil prices to new highs and trigger further inflation which is already high at levels of 6.3% in May 2021.  Government should now look to taper the price of oil by reducing taxes on oil and prevent a run away inflation due to oil.

Black Gold Inching towards 100 - Roll it back

Per litre petrol Cost today 25.5.2021

Mumbai : Rs.99.71
Chennai : Rs.95.06

Kolkata : Rs.93.49

Delhi : Rs.93.44

Let us take Chennai for further analysis.  

Price of WTI crude on 1.1.2020 - $ 61.13 per barrel

Price of WTI crude on 25.5.2021 - $ 65.65 per barrel

Increase % = 7.4%

Price of 1 litre petrol in Chennai on 1.1.2020 - Rs.78.20

Price of 1 litre petrol in Chennai on 25.5.2021 - Rs.95.06

Increase % = 21.6%

What caused this disparity? Why so high increase in domestic petrol prices?

Is it Currency?  No only marginally

USD vs INR on 1.1.2020 = 71.36

USD vs INR on 25.5.2021 = 72.79

Increase % = 2%

Is it Taxes in India?  Yes significantly

Twice in 2020 taxes were increased on petrol (March & May) - totally Rs.13 per litre or 65% increase in tax from Rs.19.98 to Rs.32,98 per litre in 2020

Overall impact on petrol price per litre = 17%

Indirect tax collections in 2020-21

Provisional figures released by Government on 13.4.2021

Shortfall of Rs.0.5 lakh crores in GST collection was more than offset by an increase of Rs.1.46 crores in central excise collections which mainly constituted tax on petrol & diesel.  The increase of 12% in indirect tax collection is mainly because of higher tax on petrol & diesel.

What the Government should do now

With the economy projected to get back into normal mode in Q3 2021-22 there should be a push for industrial development consequently improve collections under GST.   In parallel there should be a reduction in excise duty on petrol & diesel to pre 2020 levels and reduce inflationary impact on the economy.  It would do a world of good if Petrol & diesel are brought under GST ambit rather than erstwhile excise & VAT regime

Will the Government Act on this or push for more taxes on fuel and thereby fueling inflation which is the last thing the economy wants at this moment 

Oil Pricing - Let's be fair on increase & decrease

Oil prices in India have been on a dynamic pricing mechanism (DPM) for the past 18 months - from 16th June 2017 (the domestic fuel prices are dependent upon 15 days average international fuel prices taking into factor exchange rates of Rupee).  I welcomed this move as this removes subsidies and brings in transparency in pricing.  The dynamic pricing mechanism was intended to ensure that the benefit of even the smallest change in international oil prices can be passed down the line to the consumers.  Consider the below table, does this reflect the principle of DPM?

Oil prices decreased by 27% in 2018 whereas there is no reduction in Petrol prices during the year.  Technically if DPM were to work perfectly and all other items of pricing (taxes, refining costs, freight costs) remain constant retail price of Petrol in Chennai should have been atleast 11% lower compared to 1.1.2018 and should be retailing around Rs.64.55 on 24.12.2018.  True we have a 15 days average mechanism take away another 5% for it, and retail prices should be Rs.68.18 and not Rs.72.48 per litre.

To be fair we should also talk about increases not passed on when the prices were at the peak on 4th October 2018

The Government at this point intervened and reduced taxes which dropped prices approximately by Rs.4 per litre of petrol. 

DPM should be fair, it does not reflect its true strength when Government Agencies, Oil companies intervene.  DPM should be left to market forces without any intervention.  For this taxes need to be aligned under GST, on Petrol currently Rs.36 is on account of taxes which contribute 49% of retail prices of petrol.  Taxes should not be increased / decreased to suit end pricing requirements.  Oil being a prime mover of the economy should be priced fairly reflecting market conditions.  With inflation hitting lows it is imperative a fair oil pricing will lead to further growth dynamism in the economy.

Moving forward good news is petrol / diesel prices will reduce atleast by around 10% in the next 15 days as I do not foresee any increase in global oil prices and currency also will hold steady in the short term.