Is investing in oil stocks safe post Fuel Subsidy Removal?
Category: Capital Market
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.
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.
Disclaimer/Advice to Readers: While the website is checked for accuracy, we are not liable for any incorrect information included. The details of this publication should not be construed as an investment advice by the author/analyst or the publishers/Proshare. Proshare Limited, its employees and analysts accept no liability for any loss arising from the use of this information. All opinions on this page/site constitute the author’s best estimate judgement as of this date and are subject to change without notice. Proshare encourages its staff members to freely express themselves on non-client related issues and disclose their interest as a way of helping them horn their analytical and writing skills. Subscribers and Investors should see the content of this page as one of the factors to consider in making their investment decision. We recommend that you make enquiries based on your own circumstances and, if necessary, take professional advice before entering into transactions. This information is published with the consent of the author(s) for circulation in/to our online investment community in accordance with the terms of usage. Further enquiries should be directed to the author at firstname.lastname@example.org.