US economy benefitting from increasing crude oil prices!

With the crude oil touching $130 per barrel all of a sudden the US looking more profitable. Take the steel industry for example; the US steel industry was hit very hard by the low cost competition from China. Year over year the steel factories were shut down resulting to huge job losses. But recent import and production figures show something different. The latest one year production figures for steel in US shows a 10% increase compared to 20% decline for the steel imported form China. These numbers show how the US steel is fast replacing the Chinese steel, possibly closing down the cost arbitrage that existed between US and China.

So how is Crude oil responsible for this! Analysts believe that the Chinese competitiveness has gone down because of the increasing cost of transportation for the bulky Chinese products. The Chinese Steel manufactures have to import raw materials like the coking coal and iron ore from Brazil and Australia. The shipping rates have gone up considerably for these products. For one barrel of oil the Chinese have to spend close to $10 on shipping. And with increasing crude oil prices the transportation cost will only go up, thus the cost arbitrage will become smaller.

There are analysts who predict that a similar trend will be seen in other bulky manufactured products, like air conditioners, washing machines etc. But we have to remember that many production facilities in US have shut down due to the rise in imports. It will take some time for businesses to put up new production facilities to take advantage of this new opportunity. It is clear that rising crude oil prices will make the domestic producers in US more competitive. At the same time declining dollar is helping the US exports to gain new grounds in Europe and Asia. Could this be a revival for the US economy which has only faced trouble so far in the new millennium? Well only time can tell, anyways they have more than 990 years to change things.

Bull Everywhere !

Globally almost all asset classes are again touching new highs. Just recently few days ago there were talks of crude oil staying above the $100 per barrel mark. Gold is also heading towards its all time high of $850, last time I checked it was around $830 per ounce. India being the largest consumer of Gold in the world is the major source of the increasing demand for this metal.

The price of gold in India per 10 gram is clearly above Rs. 10,000. The market analysts earlier had predicted that the gold will not touch the 10,000 level because the consumers would move away from gold due to the high price. Infact it was speculated that the gold prices will stay below Rs. 9,700 when the prices were touching the levels of Rs. 9,300.

Another main reason for the increase in the Gold and crude oil is due to depreciation of US dollar. The dollar has weakened in terms of Euro from the June levels of 1.34 to the levels of 1.45 now.


Year on year gold as an investment in India has not done extremely well with returns below 10%. But in the last few months it has made good return of close to 25% to 30%. Infact it makes more sense to invest in the gold overseas in dollar terms particularly in order to best capture the depreciation of dollar. The Gold ETF’s that were recently started in the county were a good example of this. Gold ETF’s have gone up by almost close to 30% in the last six months.

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Infosys Performs Well

Infosys touched a high of 2,024 in the intraday trading and closed at 1,980 up 73.80 or 3.87%. The net profit of the company increase by 17%. The Operating margin of the company was at 32.13% an increase of over the previous quarter due to the economy of scale. Infosys is clearly able to outperform competitors like TCS, Satyam, and Wipro. Karvy is giving a target for Infosys at 2500. Foreign investors expect 20% to 25% increase in price. For Infosys 50% of revenue comes from US and 33% Europe. Also it was able to attract more Foutune 500 clients.

The FII invested close to $ 20 million in the Indian market today compared to $ 8 million yesterday. Low oil prices were a reason for the current market rally. But today OPEC decides to cut down on oil production by 1 million barrels per day. This means that the crude oil prices may rise above the $ 60, current brent crude is trading at arround $ 58.27 per barrel.

Sensex today started up with 213 point on back of infosys numbers. At the end down by 10 point to 12,353 steel and motor stocks fell close to 3%.