Why are rising crude oil prices no longer is a source of concern for stock markets?
While generally the oil prices spiking beyond a point is negative for the markets, the markets are not overly bothered by intermediate spikes in the price of oil. The general consensus is that as long as oil is under $80/bbl, it does not put too much pressure on the Indian stock markets. Remember, India imports 80-85% of its crude oil needs on a daily basis and so the oil prices globally do have a huge bearing on the stock markets and on the economic health. However, there are several reasons why the stock markets in India have been less vulnerable of late to spikes in Crude oil prices.
- The most important macro factor is that robust oil prices is normally an indication of overall economic growth while very low oil prices is a sign of an economic slowdown. That is why, markets prefer oil prices to be generally buoyant, without being excessive. It shows that the overall economy is growing and there is enough demand for oil. Globally, the US, China, India and Japan are among the major oil consumers.
- Secondly, India has largely monetized the fall in oil prices through higher oil revenues. When the oil prices were falling sharply post 2014, the government sharply raised the excise duties on petrol and diesel and managed to early billions of dollars in the process. This helped them to create a reserve which could be used by them to smoothen out any disruptions in the oil price movements. Hence even if oil spikes to about $80/bbl, it is something the government can handle quite well, without impacting the economy or the stock market.
- The third reason is the nature of the stock market. When we look at the heavyweights in the Indian listed space, then most of the oil companies are either oil extraction or oil refining companies. Oil extractors stand to benefit from higher crude prices while oil refiners also benefit from higher crude prices as it tends to improve their gross refining margins (GRMs) and the inventory valuations. It is only the pure marketing oil companies that stand to lose if the oil prices go up, but in terms of weightage they are quite small.
- The fourth factor is the Russia factor. In the last one year since the US imposed sanctions on Russian oil and the UK and EU joined in, India has ended up being the larger buyer of Russian oil. For instance, Russia’s share in the Indian oil basket has gone up from 1% to 42% in the last 15 months. The price of Russian oil for India is a negotiated price and it has little relevance to the price at which Brent crude trades.
- Lastly, the equations of oil have changed in the last 10 years. From the suppliers setting the tone of oil prices, it is now the buyers that are setting the terms. That is what has given countries like India and China tremendous bargaining power with the oil. The demand side of oil knows quite well that even if the price of oil spikes, they have the upper hand when it comes to pricing. That has worked fairly well for the Indian economy and the stock markets. There is a growing awareness that even if oil prices show signs of spiking, the demand factor continues to rule the roost.
To sum it up, the undertone of oil is changing from a sellers-market dominated by the OPEC to a buyers-market dominated by the likes of India and China. Most of the traditional oil producers realize that they can no longer take buyers for granted. That is at the core of why Indian markets are not overly bothered about rising oil prices.
Share Market Today
|Indices Name||Price||Price Change (% change)|
|S&P ASX 200||7033.20||12.9 (0.18%)|
|CAC 40||7135.06||18.82 (0.26%)|
|Dow Jones||33507.50||-158.84 (-0.47%)|
|FTSE 100||7608.08||6.23 (0.08%)|
|Hang Seng||17822.58||458.27 (2.64%)|
|US Tech 100||13224.32||18.04 (0.14%)|
|Nikkei 225||31793.41||-64.21 (-0.2%)|
|S&P 500||4288.05||-11.65 (-0.27%)|
|Gift Nifty||19613.50||-43.5 (-0.22%)|
|Shanghai Composite||3110.48||3.16 (0.1%)|
|Taiwan Weighted||16557.31||203.57 (1.24%)|
|US 30||33684.00||19 (0.06%)|
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