Oil turmoil: How do Indian markets react when Brent tops $100?

Out of the 60 months (since January 2000) when Brent has traded above $100, Sensex has given negative returns for 35 months (on US dollar basis).

Life is just one darned thing after another. Investing even more so, going by recent events.

Just when it seemed the after-shocks of the global banking crisis had subsided, markets were hit by another thunderbolt – this time from the OPEC+ cartel.

The Organization of the Petroleum Exporting Countries (OPEC) and their allies, including Russia, on April 2 stunned global markets by announcing production cuts of about 1.16 million barrels per day (bpd).

This was on top of the 2 million bpd cuts declared in October 2022. The latest OPEC decision along with Russia’s voluntary production cut of 500,000 barrels per day will take a total of 3.66 million barrels off the market -- roughly 3.6 percent of the total world supply.

As investors scrambled to digest the latest geopolitical flashpoint, global oil benchmark Brent shot up over 6 percent on April 3 – the biggest one-day jump in a year -- to about $85 per barrel.

Financial analysts, who just a few days back were wagering on softer crude prices amid the banking crisis, suddenly saw their rosy projections being ambushed by reality.

“Any unexpected 1 million barrel per day change in supply or demand conditions over the course of a year can impact prices between $20 and $25 per barrel,” Bank of America said in a note.

Goldman Sachs raised its Brent forecast to $95 a barrel for December this year from $90 earlier, and to $100 for December 2024.

Some estimates were even gloomier.

The probability of Brent crude reaching $100 before the end of the year “certainly has increased following these measures,” according to ANZ’s senior commodity strategist Daniel Hynes.

The RBI too in its Monetary Policy Report for April 2023 said the output cut decision of OPEC-plus imparts “significant uncertainty” to the outlook for Brent prices.

Oil touching the three-figure mark has been a fly in the ointment for Indian policymakers since a long time.

Not without reason.

India is the world’s third largest oil consumer and importer, after China and the US. The country meets about 80 percent of its oil requirement through overseas shipments.

Spiking crude prices swell India’s oil import bill, which nearly doubled to $119 billion for FY22 from $62.2 billion in the pandemic-hit 2020-21.

Red-hot crude also leads to imported inflation, puts further pressure on the rupee and throws India’s fiscal math haywire.

All in all, a vicious cocktail of chaos.

Also Read: Oil price spike is like an earthquake for fragile world

For Dalal Street denizens, however, oil at $100 is a particularly potent harbinger of ill omen.

As per an analysis of data for the past two decades, any month when Brent has touched the three-digit mark, Sensex returns have been subdued at best.

Out of the 60 months (since January 2000) when Brent has traded above $100, Sensex has given negative returns for 35 months (on US dollar basis).

Such is the potency of firm oil prices that there were months when Brent traded above $100 only for a couple of days, but still the Sensex posted negative returns for that month (February 2008, January 2011, September 2014, among others).

Even for the 25 months when the benchmark held its ground, the average return has been just 6.78 percent – less than half of its long-term average.

It goes without saying that the market direction is determined by many other factors apart from petroleum prices.

But what makes oil a good proxy for global sentiment, especially for emerging markets, is that surging prices are usually accompanied by ratcheting up of geopolitical tensions, increased sell-off by foreign investors and a general deterioration in financial metrics for importing nations.

So will the situation be any different when oil hits $100 the next time around? Highly unlikely.

Some analysts, in fact, say the current round of output reduction will have a more damaging impact on global growth.

Kotak Institutional Equities, in a report on April 3, said the output cut declared by the oil-producing group is a much bigger one than the one from October last year. When OPEC announced a reduction in the supply of oil by 2 million barrels per day last year, several member countries were already producing below their target, which made the actual output cut smaller.

“In contrast, the current cut has been announced by countries that are producing at target levels or higher. Thus, the likelihood of the entire 1.5-1.6mb/d production being cut is high, in our view,” Kotak said.

Hard to catch a break, isn’t it?

When Silicon Valley Bank, Credit Suisse and other lenders suddenly imploded in March, many market veterans quipped that it was the perfect time for newbie investors to experience what the stormy days of 2008 felt like.

In a moment dripping with cosmic justice, many of these veterans themselves are now getting a glimpse of the classic 1970s oil shock.

In this market, it seems not just the new but even the seasoned players are being forced to revisit some very old lessons.