How oil can spoil the market party: impact on economy, market sentiment, sectors and stocks

Economically, every $10 rise in oil prices widens India's current account deficit by 0.55 percent

Oil markets saw a knee-jerk reaction overnight as fears of wider conflict in the Middle East crept in. Brent crude prices shot up as much as 4 percent after Iran launched a second direct missile attack on Israel this year. Until now, markets were discounting an all-out-war between Iran-Israel, but recent events point out to a widening escalation that could trigger correction up to 15 percent if Brent breached $85-mark, say market experts.

Deven Choksey, Managing Director at DRChoksey FinServ pegged markets to undergo correction in the range of 10-15 percent in the near-term as technical levels have turned weak due to overbought conditions.

Additionally, the new Sebi changes in F&O regulations, China's stimulus measures, and expectations of modest growth in upcoming earnings season are likely to weigh on the sentiment.

Deepak Jasani, Head of Retail Research at HDFC Securities, shared a similar view, noting that markets are already in a corrective phase following a recent pullback. He estimated a smaller correction of up to 6 percent in the short term. Jasani highlighted that a $10 increase in crude oil prices could stoke inflation concerns and impact India's fiscal deficit, which may further trigger a market downturn.

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Economically, every $10 rise in oil prices widens India's current account deficit by 0.55 percent and increases the consumer price index (CPI) by 0.3 percent, as oil constitutes a large portion of the nation’s import bill. This would deplete foreign reserves, lead to rupee depreciation, and drive up import costs, squeezing corporate profits and triggering market corrections.

Until Brent soars by another $10 per barrel, markets will ignore it, pointed out VK Vijayakumar, chief investment strategist at Geojit Financial Services. In the past month, brent declined 9 percent, posting its third straight month of decline and biggest monthly drop since November 2022. It also posted biggest quarterly loss this year, down 17 percent in Q3.

Which sectors will be impacted?

Sector-wise, analysts at Motilal Oswal identified the industries most vulnerable to rising oil prices.

Paints: Manufacturers like Asian Paints, Berger Paints, and Nerolac Paints face increased raw material costs due to the oil-based derivatives they rely on, which could erode their profit margins.

Oil Marketing Companies (OMCs): Firms like IOC, BPCL, and HPCL, which refine crude oil into petroleum products, will see their input costs surge, impacting their bottom lines as crude is a major expense.

Aviation: Airlines like Interglobe Aviation and SpiceJet will struggle with higher operational costs from rising fuel prices, forcing them to carefully adjust fares to avoid deterring passengers while maintaining profitability.

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