Oil < USD100 is a game changer for India : Motilal Oswal

Oil falling to USD100 levels
 23% decline from recent peak of USD126
 Major potential positives: CAD/GDP down
0.3-0.5%, fiscal deficit/GDP lower by 0.3%,
inflation down 40-97bp
 Oil @ 100 equal to oil @ 80 in FY08
 Oil < 100 a major game-changer for India:
positive spin-offs on growth, corporate
profits and valuation

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Brent crude below USD100/bbl, though intra-sector
anomalies persist: Brent crude price has fallen 23%
below the peak of USD126/bbl scaled in March 2012. It
has declined to below USD100/bbl after a gap of 15
months, driven by concerns on the European economy
and overall slowdown in demand. While structural
anomalies like (a) price differential between WTI and
Brent, and (b) delinking of gas price from oil are likely
to continue in the medium term, US efforts to become
energy independent could alter the oil markets forever.
Significant relief to India's external and internal
balance: High dependence on oil imports (~80% of
India's requirement is imported) makes India
susceptible to international oil price fluctuations. Oil
price directly affects current account deficit (CAD), fiscal
deficit and inflation. It also has an indirect impact on
corporate performance, and to a lesser extent, on
growth and employment. Our estimation of the direct
impact of every USD10/bbl decline in oil price on the
three key macroeconomic variables is as follows:
 CAD/GDP ratio would decline by 0.3-0.5% even after
factoring in reduced export proceeds, co-movement
of oil prices with other commodities, and possible
decline in remittances from the Middle East.
 Fiscal deficit would decline by 0.3% of GDP under
current conditions. The government has the ability
to withstand oil price of USD110/bbl only at an
exchange rate of INR48/USD, but this improves
dramatically to INR60/USD, if oil price comes down
to USD90/bbl. The government's subsidy provision
for FY13 merely equals its 4QFY12 obligation. Thus,
even at oil price of USD100/bbl, there is a risk of
fiscal slippage of 0.4% of GDP. At the current
exchange rate and domestic product prices, the
zero-subsidy breakeven crude price is USD76 for
diesel, at USD65 for LPG, and USD25 for kerosene.
 Inflation benefit would vary between 40bp (under
no pass-through) and 97bp (when there is complete
pass-through). Falling oil price gives the
government higher flexibility on pass-through
pricing, the first step towards deregulation.
Oil < USD100 is a game changer for India: Oil at USD100
today is equivalent to oil at USD80 in FY08 in terms of
the stress it creates for the economy. Lower oil price
would augment corporate profits. Financials, Autos and
Oil companies are direct beneficiaries. Moreover,
receding fears of inflation increases headroom for
monetary easing and investment revival. All of this is a
major sentiment booster for higher valuations.


Brent crude hovering around USD100/bbl
Intra-sector anomalies persist: WTI discount to Brent, oil-gas price divergence
Brent crude price has fallen 23% below the peak of USD126/bbl scaled in March 2012. It has
declined to below USD100/bbl after a gap of 15 months, driven by concerns on the European
economy and overall slowdown in demand. While structural anomalies like (a) price differential
between WTI and Brent, and (b) delinking of gas price from oil are likely to continue in the
medium term, US efforts to become energy independent could alter the oil markets forever.
Brent crude price below USD100/bbl after 15-month gap
Brent crude price has fallen 23% below the peak of USD126/bbl scaled in March 2012.
It has declined to below USD100/bbl after a gap of 15 months, driven by currency
movement, the European economic crisis, slowdown in China and moderation in the
Iran conflict, among others. Crude oil inventory in the US, a crucial determinant of
international oil price, has increased rapidly and is currently at a two-decade high.


US quest to become energy independent could alter oil markets forever
Structural factors have created certain anomalies within the oil sector, which may
persist in the near term. These include (a) price differential between WTI and Brent,
and (b) delinking of gas price from oil. Further, increased shale gas production and
tight oil production led by improved technology is expected to reduce US dependence
on oil imports (gas imports already nil) over the coming decade. This will not only
have implications for oil price but will also lead to a structural shift in oil market
dynamics:
 WTI at discount to Brent: Infrastructure bottlenecks and continuing heavy oil
supplies from Canada are creating a glut in Cushing, Oklahama (where most
regional oil pipelines converge), resulting in depressed WTI prices. Despite WTI
crude being of superior quality than Brent, it is trading at a discount of ~USD15/
bbl. While reversal of Seaway pipeline should ease some pressure at Cushing, oil
supplies from Canada are likely to prevent narrowing of Brent-WTI gap.
 Oil-gas price relation disrupted: Historically, prices of gas have been governed by
regional demand-supply dynamics due to its low fungibility v/s oil. However, the
price relationship between oil and gas was largely being maintained. Post the
emergence of shale gas, the price relation has collapsed in the US. Likely exports
from the US in LNG form are threatening to disrupt the worldwide price relation
between oil and gas.


Oil < USD100/bbl is a game changer for India
Favorable spin-off on growth, corporate profits and valuations
Oil at USD100/bbl today is equivalent to oil at USD80/bbl in FY08 in terms of the stress it
creates for the economy. Lower oil price would augment corporate profits. Financials, auto
and oil companies are direct beneficiaries. Moreover, receding fears of inflation may trigger a
major change in monetary policy stance. Lower inflation and energy cost also help to boost
the GDP and close the demand-supply gap. Above all, it is a major sentiment booster to enrich
valuations.
Oil @ USD100/bbl today equivalent to oil @ USD80/bbl in FY08
Over the years, the Indian economy's capacity to withstand higher oil price has
improved. If oil price holds at USD100/bbl in FY13, the stress for the economy in terms
of net import and subsidy bill would be similar to that of FY08. Thus, oil at USD100/bbl
today is equivalent to oil at USD80/bbl in FY08, in terms of its direct impact.


Multi-fold benefits of oil price declining to below USD100/bbl
Decline in oil price is a major sentiment booster, especially for the corporate sector.
Besides the direct beneficial impact on external balance, government finances and
inflation, it indirectly helps to boost growth. For its per capita income, India's energy
cost is one of the highest in the world. Lower oil price helps to augment corporate
profits. Financials, auto and oil companies are direct beneficiaries. Moreover, receding
fears of inflation may trigger a major change in monetary policy stance. Lower inflation
and energy cost also help to boost the GDP and close the demand-supply gap. Above
all, it is a major booster of market sentiment, leading to richer valuations.