World of India!

An important piece of news that seems to have escaped notice in India, is that fact that Russia has now overtaken Saudi Arabia in oil production. In the month of June 2006, Russia produced 9.236 million barrels which is 46000 barrels more than Saudi Arabia. Traditionally, it has been the Saudi Kingdom which holds the scale as to where the price of crude will tilt, due to its ability to pump up (and down) production at a short notice. Although it is still early days yet, it looks like going ahead that role would now shift to Russia, given the fact that Saudi oil reserves are in active production for a much longer time, whereas Russia has relatively many Greenfield projects, which have just come up or in the process of being operationalized.

Its important to chew on this piece of news a bit, since it looks like this means that in the medium to the long term, the AVERAGE price of crude will not climb to "unaffordable" prices, just yet. Analysts of crude prices have long since been divided into two camps. One believing that crude being perishable resource, is bound to face a glut some time between 2020 to 2040 and from then on the prices would reach stratospheric levels. The other camp has always held that crude supplies have never been fully explored and there are large tracts of the world, where crude can be and will be exploited going ahead. They contend that this means that the price of crude would rise, but adjusted for inflation, it will not rise to "stratospheric" levels and therefore would continue to remain the primary source of fuel, for at least the foreseeable century or two.

In the past decade or so, it is the latter camp which seems to be scoring over the former, despite the short term spike in crude we witnessed in the last six months or so (when crude came perilously close to $80 levels, before climbing down to sub -60 levels now). At the same time, its a fact that oil suppliers are much more diversified now, from Venezuela to Russia to many African nations, discovering oil. The Alaskan reserves are estimated to be humongous and it is only a matter of time for the U.S to decide to go for them. And now that we have the Russians, who are literally going hammer and tongs in Siberia, the Oil evangelists seem to be having the last laugh.

What does it mean for you and me? Well, if you are an equity investor, its time to sell ONGC (an oil producer) and buy the oil retailers (HPCL, BPCL). Although, one must bear in mind that oil will continue to be volatile and therefore one has to be prepared to ride these difficult horses along with that. Also buy Auto stocks and auto ancillaries, which depend on oil staying where it is or just tracing the inflation rate.

And if you are planning to buy a new car, go ahead. Don't worry about the oil price moving beyond Rs. 100-150/litre just yet.

So far at least, oil's well that ends well.

This entry was posted on Friday, October 13, 2006 at 11:23 AM.

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