History suggests that a severe crash or a spike in crude prices works negatively for markets, as it’s a sign of disturbance in the demand-supply equilibrium.
Brent Crude oil prices have crashed more than 50 percent, so far, in 2020, touching a new four-year low on March 16 amid fears of a recession due to the coronavirus outbreak that has now spread to 150 countries and territories.
The emergency rate cuts by the US Federal Reserve and policy measures initiated by other central bankers have failed to calm investors, pushing the crude below $30 a barrel. Brent Crude fell to $29.52 a barrel on March 16, its lowest since January 2016.
The drop in price should cheer Indian investors as the country meets more than 80 percent of its oil requirement through imports.
Typically, a fall in crude prices is good for the Indian economy as it favours the trade balance and aids economic growth, but the current decline is on the back of fear of a global slowdown that is wrecking equity markets across the world.
During the 2008 global financial crisis, crude oil prices plunged nearly 70 percent in seven months on concerns that the subprime crisis threatened the global financial system.
The fall in crude prices was mirrored in global equities too, as the common factor was a global slowdown, say experts.
“When it is the question of severe impact on the global economy, crude oil and wider markets can’t be seen separately. To cite another case, crude oil prices plunged over 50% from 2014 to February 2016 as the US shale supply increased and demand for oil in emerging economies weakened,” said Praveen Singh, AVP, Fundamental Research – Commodities, Sharekhan by BNP Paribas.It could be inferred then that an orderly decline in oil prices due to orderly rise in supplies was somewhat good for the Indian economy and the wider markets but a steep decline in an otherwise stable oil market won’t be that good for the wider Indian markets, he said.
The economic impact
The coronavirus outbreak has shaken the oil market fundamentals, depressing demand prospects despite OPEC and non-OPEC countries cutting supplies.
With Russia pulling out of the deal, oil prices have fallen by 9.4% on an intra-day basis, CARE Ratings has said in a report.
A fall in the prices augurs well for the Indian economy, considering the country imports more than 80 percent of its oil requirements, says the report.
In the current financial year, India has imported 4.5 mb/d (April-January) of crude and import dependency based on consumption has increased to 85 percent compared with 83.5 percent in the year-ago period.
A media report said a $10 per barrel decline in crude oil prices on an annualised basis reduces the current account deficit by $15 billion.
There is no doubt that the fall in crude prices will be beneficial for the Indian economy and help narrow current account deficit but from a market’s point of view, it carries a different meaning.
“As per the past trend, any severe crash or spike in crude oil prices work negatively for the markets as it’s a sign of disturbance in the demand-supply equilibrium. However, the recent crash in crude is also accompanied by economic slowdown across the globe due to coronavirus, which could have a greater adverse impact on the markets,” said Ajit Mishra VP Research, Religare Broking.
“In the long run, crude price fall will help contain the fiscal deficit to an extent and may lead to a more accommodative RBI monetary policy, which would be good for the economy as well as the markets.”
Santosh Meena, Senior Analyst, TradingBells, also said that fall in crude prices is always positive for the Indian economy but anecdotally, market moves in the direction of oil prices because a sharp fall always leads to worries of a global recession, which is not good for the Indian market.
“If we talk about the long term, then crude oil may bounce back from lower levels but the upside will remain limited due to higher supply, which is going to be a long term positive for the Indian market,” he said.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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