Fall in crude prices - Opportunities?


I was looking into companies which will have a sustainable higher level of profits should the oil prices stay at 85 USD levels (steep fall of 20% in 3 months). Any ideas?


Beyond the obvious oil marketing companies and others like ONGC & Oil India (for their reduction in the subsidy burden), you could look at downstream industries like plastics (Supreme Inds, Astral, Finolex Inds, Sintex etc) or Chemical companies for direct beneficiaries. Overall, lower prices has a cascading impact on the overall economy and touches nearly everything. So, lesser subsidy, lower trade deficits, lower inflation, better investment sentiment etc etc.

You can also short cairn. There are more reasons to short it anyway!

Oil prices have fallenmore than 60% in theglobal markets. Under $50 per barrel.

But oil companies have not gone down by 50%. Exception Cairn and Selan.

Oil services companies hve taken a fair beating.

Are there any opportunities in this space?

Sudden falling of crude price will have negative impact in short term for oil companies because the companies will be having inventory losses in results. This is the reason why ONGC, Reliance have fallen recently. Wait for results which may give better opportunities to buy at lower levels.

Import price of crude has gone up by more than 30 percent in the last one year, certain sectors would face headwind while few would see this as an opportunity. In the past, starting from 2014 crude prices were under pressure due to shale gas production in the US, these production levels went up to 13 million barrels per day. 2020 has devastated shale industry resulting investors with huge losses to the extent of -$300 billion, enthusiasm to rebuild the capacity is missing.
Shale producers in the current scenario are not scaling up their operations like pre-covid level. These companies are seeing huge cashflows, but reinvestment rates are not commensurate with demand as we can see below.

Courtesy CSIS
Based on the information available at oilprice.com, Indian Basket is about 2 to 3 percent expensive compared to average.

Conclusion: There is no evidence of crude prices falling soon, American companies may not come to our rescue this time. We should be conscious about investing in companies that have a high inverse correlation with crude prices