Crude oil prices have been on a downward trend in 2023. After hitting a six-month low, prices reclaimed some ground on December 7. Analysts, in a concerted voice, agreed that the falling oil prices could help India ease inflation. They also pointed out that the decline in oil prices will also provide a boost to the Indian equity market, especially the sectors that use crude oil as raw material. Conversely, some sectors can plummet.
Brent crude futures rose 27 cents, or 0.4%, to $74.56 a barrel by 0613 GMT on December 7. US West Texas Intermediate crude futures rose 24 cents, also 0.4%, to $69.62 a barrel, according to a report by Reuters.
Oil prices settled on December 6 at the lowest level since June, falling around USD 25 from their September highs amid concerns over oversupply and weaker demand. WTI fell by 4 per cent, closing at USD 69 per barrel. Brent crude was down more than 3.6 per cent, closing at USD 74 per barrel level. Crude has come under downward pressure since last week's meeting of the Organization of Petroleum Exporting Countries (OPEC) that discussed how the package of voluntary cuts will be carried out. Saudi Arabia mentioned that cuts by OPEC would be honoured in full and could be extended, pushing back against persistent scepticism over the curb's effectiveness, according to various reports.
How will it impact the Indian stock market?
Speaking about how reduced oil prices can ease inflation and current account deficit, Aamar Deo Singh, Head Advisory, Angel One Ltd, said, "With energy prices dropping, inflationary fears have subsided, and central bank rate hikes are unlikely. These main underlying drivers are adding fuel to the already positive sentiment, which is reflected in the market's overall surge."
"The benchmark index, the Nifty50, is up 15% year to date, indicating that both domestic and foreign investors continue to be bullish on India. Going forward, if crude oil prices continue to fall, it bodes positively for the markets because the chance of future rate cuts increases, which would be a boost to the economy," he told Mint.
Sectors to be impacted
Amit Goel, co-founder and chief global strategist of PACE 360, echoed Singh's perspective on the impact of crude oil prices. "Sectors such as transportation, manufacturing, and energy could witness a positive upswing due to decreased input costs, thereby bolstering investor sentiment."
"India imports more than 80% of its crude oil requirements. Hence, falling crude oil prices are positive and will lower its import bill and CAD/fiscal pressure, reduce imported inflation, etc. Further, this will reduce working capital requirement, reduce operating cost, etc for refiners," said Sumit Pokharna, Vice President – Research Analyst Kotak Securities.
"We do understand that there is a direct relation between prices of key products with crude costs such as aviation turbine fuel, titanium dioxide, carbon black, high-density polyethene, and pet co*ke. Hence, it is positive for sectors like paints, tyres, FMCG, cement, and airlines, which use the same," added Pokharna.
He also claimed that there is a possibility of reopening talks of disinvestment of BPCL.
Not all sectors are going to be impacted positively by the crude oil price fall. "The situation is a double-edged sword. The Indian stock market hosts a significant energy sector, and companies within this domain may witness diminished revenues and profitability with the decline in oil prices," Priyanshu Mishra, Managing Director, Blue Bell Capital, told Mint.
What are the reasons for the decline?
One of the primary reasons behind the fall in crude oil prices can be attributed to the global economic slowdown and recessionary concerns, as reported by the International Monetary Fund. Its forecast for global growth in 2023 is 3.0 per cent and 2.7 per cent for 2024, which is a decline from the 3.0 per cent forecasted in July.
"The economic slowdown and recessionary fears have exerted downward pressure on crude oil prices," said Omkar Kamtekar Research Analyst, Bonanza Portfolio Ltd.
China's economic condition worsened over the past year, with the real estate sector imploding, adversely impacting the banking sector. "In September, China's consumer prices remained flat, on the verge of deflation, while the producer price index saw annual declines slow for a third month. This is a major cause of the fall in crude oil prices," said Kamtekar.
Additionally, US crude stocks rose by 3.6 million barrels last week to 421.9 million barrels, according to the US Energy Information Administration (EIA), far exceeding analysts' expectations in a Reuters poll for a 1.8 million-barrel rise in November this year.
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