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Is investing in oil stocks safe post Fuel Subsidy Removal?

Category: Capital Market


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Is investing in oil stocks safe post Fuel Subsidy Removal?

 

 January 11, 2012

*      Oil futures rose to a two-day high USD 102.66

*      Fuel price hike affected Market Volume

*      Oil stocks indifferent to removal of fuel subsidy  

*      Inflation and Interest Rate will increase

The two-day-old general strike has not yet affected the output of Africa’s top oil producer but it has paralyzed the country and sent the government, already battling a brutal campaign by an Islamist group, into crisis mode.

The strike started on Monday by labor unions upset over high fuel prices in Africa’s most populous nation. Gas prices have risen from $1.70 (€1.33) per gallon to $3.50 per gallon since the subsidy on fuel ended on January 1 after orders from President Goodluck Jonathan’s administration.

Country produces approximately 1.9 million barrels of oil per day, making it Africa's largest oil producer, according to the U.S. Energy Information Administration.

Nigerian workers began a national strike after fuel costs more than doubled, threatening to shut ports and disrupt output from Shell Plc and Chevron Corp. (CVX) in Africa’s largest crude producer. So far the strike hasn’t affected the oil exports of Shell, which has the biggest operations in Nigeria, company spokesman Tony Okonedo said today by phone from Lagos

Oil futures rose to a two-day high on Tuesday, as concerns over a disruption to global oil supplies supported prices. On the New York Mercantile Exchange, light, sweet crude futures for delivery in February traded at USD102.56 a barrel during European morning trade, rallying 1.25%.It earlier rose by as much as 1.35% to trade at a two-day high of USD102.66 a barrel.

Despite the catalyst, the markets marginally fell last week by 0.03% and later in the last two trading sessions of this week, it remained buoyant gaining 0.37% and 0.50% respectively despite fuel protests and religiously motivated attacks which further added to the cards.



 

Although the Nigerian Stock Exchange tried to maintain its normal trading during the nationwide strike, but volume was low.

The Average Volume and Value performance traded in the last two sessions is 52.14 mln and N1.12bn respectively.

The market for the week ending January 6, 2012 recorded a total volume of 1.04bn units valued at N5.47bn compared with 1.97bn units valued at N13.00bn. Comparing, the volume and value traded in the week reveals a low market turnover by -46.77% volume growth and -57.87% value dip against the previous week’s comparable period respectively.




Stock Price Movement of Oil and Gas Sector

If you have stocks of some petroleum companies in your portfolio, you might not be affected much on fuel subsidy removal as 70% of the stocks listed under Oil and Gas Sector did not showed any movement in response to steps taken by Federal Government, President Goodluck Jonathan on deregulation of the downstream sector of the oil industry and the associated removal of petrol subsidy.



Share prices of Petroleum and Petroleum Products Distributors, led by Forte Oil, took a hit on the NSE by 5.00% while Eterna Oil lost 11.49% after the Federal Government removed the fuel subsidy.

Other Petroleum and Petroleum Products Distributors like FO, AFROIL, BECOPETRO, CAPOIL, CHEVRON, CONOIL, MOBIL, RAKUNITY, TOTAL, and UNIONVENT did not showed any movement.

The announcement of the fuel subsidy removal for Integrated Services Company, Oando marred the mood of the investors which in-turn saw the stock ending the period on weaker note slipping 4.55% to settle at N21.00.

Oil Equipment and Services Company JAPAULOIL ended the period on positive note by 3.33% at N 0.93.
 

Though stocks in Oil and Sector were neutral, but before buying oil stocks, investors should always check the global demand scenario, inventory levels, geopolitical issues and gross refining margins (GRM) of companies, Regulatory Environment and see whether these affect the earnings of the company you plan to invest in." 

The Big Rider

An abrupt removal of subsidy had caused dislocation to price of gas leading to labor strikes and chaos.

EFFECTS

Inflation will rise. There is no doubt over the same. In the short term and medium term overall inflation will rise.

*      Interest rates: Higher inflation will lead to higher the cost of borrowing.

*      Private sector oil companies and oil marketing company’s margins will rise.

*   Fiscal deficit will be contained but all depend on the monsoon which so far has had unsatisfactory progress.

*      Basic Commodities and Utility Costs will increase.

 

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