Will market feel pressure as crude oil cruises above $90?

Brent crude prices soared around 7 percent in the past week to over $90 per barrel, its highest in 10 months, amid concerns over supply shortages as major oil producers, Saudi Arabia and Russia, extended their production cut to the end of 2023.

With crude oil prices rising above $90 per barrel and analysts expecting a range bound movement for benchmark indices in the near term, investors have become cautious. While high oil prices and growing expectations of another US Fed rate hike pose a threat of triggering a correction, analysts do not expect a major fall at this time. They advise investors to use the opportunity to accumulate quality stocks on any dips.

Brent crude prices soared around 7 percent in the past week to over $90 per barrel, its highest in 10 months, amid concerns over supply shortages as major oil producers, Saudi Arabia and Russia, extended their production cut to the end of 2023.

Oil concerns prompted an uptick in the dollar index to a six month high of over 105 earlier this week, which is bad news for foreign investors as it reduces the value of their investments in non-dollar denominated markets.

Caught amid these developments, foreign institutional investors have sold domestic equities to the tune of Rs 7,850.70 crore in the first four trading sessions of September.

Analysts on watch, but not too worried

A K Prabhakar, Head of Research, IDBI Capital Markets, said that even though the rising dollar index may have some bearing on FIIs in the near-term, domestic investors will remain active, supporting the market and keeping any major correction in check.

Sanjeev Hota, Head of Research at ShareKhan, also believes that these headwinds will pose concerns over the economy in the near term from an economic perspective, but doesn't expect it to trigger a major correction in the market. "Investors will not rush to react to a weekly rise in oil prices, they would rather wait for some time before pulling money out of equities," said Hota.

Both analysts believe the market will remain in a wait-and-watch mode in the coming weeks. "If oil prices continue to remain at elevated levels for a longer time, then yes, some correction can be seen," Hota added. Prabhakar also doesn't anticipate any strong upside making its way in the market.

If oil is on the boil, why is India not feeling heat?

The credit for shielding India from high oil prices goes to the government’s handling of supplies to some extent. "The government has cushioned oil in a very good way,” Prabhakar said.

“They (Government of India) will be able to survive at least two-three months even if high oil prices sustain as they've already built a strong profit buffer by not lowering prices in the domestic market even when oil prices moderated globally," he added.

Also Read | Oil jumps as Saudi Arabia, Russia extend supply cuts to end-2023

As for concerns over the possibility of another rate hike from the US Fed, Hota believes the market has already discounted it, as data remains mixed in the US economy. “The Fed has kept the possibility of more rate hikes open by choosing to go data-dependent because of which the market also seems to be pricing in more rate hikes," he explained.

Valuation supportive, no compelling reason for a tumble down

Another factor pointed out by analysts was the fact that current valuations also seem to be reasonable when compared to the long-term average, and hence, there may be no selling pressure from that front as well.

All these factors hint at a subdued trend awaiting the market in the near-term rather than the possibility of a steeper correction.

Where is crude oil price headed?

The tightness in oil prices may not sustain for a longer period, at least in the near term, said Antique Stock Broking, forecasting oil prices to remain at about $80 per barrel.

Also Read | Brent crude surge to $90 boosts upstream oil stocks, but upsets paint makers

"Fundamentals appear to be easing from here on, till the next driving season. We see inventory draw slowing down over the next four months, with a big inventory build in the January-June period, thanks to seasonally weak demand and sharp growth in non-OPEC supply. This is likely to keep crude around $80 per barrel during this period," the firm said in a report.

However, the brokerage hedged its view, advising caution that the 2024 driving season has the potential to elevate prices above $90 per barrel, given the low inventories pre-driving year-on-year, unless Saudi Arabia decides to reverse the current production cut.

Keep an eye on smallcap, mid cap surge for a nasty surprise

While the benchmark Nifty 50 had put brakes on its bull run after slipping over two percent in August, the broader market had continued marching ahead.

The Nifty Smallcap 100 and Nifty Midcap 100 outperformed the headline index by around seven percent each in August, to further go on to test lifetime highs in early September. Given the sharp rally seen in that space, it is small and midcaps that are likely to see some profit-taking on the back of high oil prices and a strengthening dollar index.

However, analysts vouch for strong growth prospects of several companies and sectors operating in that space and suggest investors take any correction within the broader market as an opportunity to accumulate quality stocks.

Also Read  | OMC shares tumble 3-10% since Aug amidst crude surge, lower Russian discount

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