What does the fall in oil prices mean for Indian equities

In what was perhaps the wildest, unprecedented swing in the financial market since COVID-19 broke out, US oil prices crashed to a record low falling in the negative territory for the first time.

The price on the futures contract for West Texas Intermediate (WTI) fell to negative $37.63 a barrel, a one-day drop of $55.90, or 306 percent, according to Dow Jones Market Data.

Yes, buyers actually got money from sellers to take contracts off their hands!

Oil prices spiralled out of control primarily due to the steep collapse in demand as life came to a standstill due to lockdown in various countries to curb the spread of COVID-19. The Russia, OPEC price war added even more crude inventory to an already oversupplied market.

So, what does this mean for equities?

The fall in oil prices generally augurs well for the D-Street as India imports the commodity in huge quantities and lower prices mean lower trade deficit and lower inflation.

Energy stocks constituted 12.5 percent of Nifty50 and about 15.2 percent of the Sensex, until 2019.

Higher crude prices adversely affect tyre manufacturers, footwear, lubricants, paints, and airline companies. A fall in oil prices will drive production cost lower and stock prices higher.

If the fall in crude actually translates into lower petrol and diesel prices, the transportation cost will come down significantly, further driving up profits for the companies. According to Kotak Securities, consumer durables could be the biggest beneficiary of the fall.

"Consumer durables are manufactured in industrial units and then sold in various cities across India. A fall in the logistics cost of these goods will bring down their final price. A fall in prices of consumer goods raises its demand and thus its stock price," the brokerage noted.

It will also decrease India's Current Account Deficit (CAD) as the country is among the largest importers in the world, buying three-fourths of its oil needs.

"Every U$10/bbl increase in oil price leads to a 0.55% or 55 bps increase in the current account deficit. Therefore, a fall in the price of crude oil will have a positive impact on India’s current account deficit situation. Lower CAD will mean reduced stress on foreign currency outflows," said Kotak.

"This, in turn, may lead to rupee appreciation. If the value of rupee appreciates, the imports become cheaper. This will affect the companies who depend on import crude oil and other raw materials, for their business. The price of stocks of these companies will thus experience a rise," it added.

According to the brokerage, it will also keep the inflation in check. Inflation is often perceived negatively by investors. Thus, a comparatively lower inflation level will be beneficial for the stock market, it noted.