Crude oil prices are close to their highest level in nearly 10 months. They might go above $100 because of reduced supply and China’s economic improvement. This could affect the Indian stock market by increasing the fiscal deficit, weakening the currency, and causing inflation.
Crude oil prices are close to their highest point in the past 10 months, thanks to a reduced supply outlook and expectations of strong demand. The Brent Crude benchmark is currently trading at around $93 per barrel.
Recently, oil prices have surged following an announcement by OPEC and its allies, known as OPEC+, that they will extend oil production cuts until the end of 2023. Experts predict that oil prices could continue to rise from their current levels due to this supply deficit.
According to a report from Reuters, the International Energy Agency (IEA) has stated that the oil output cuts by Saudi Arabia and Russia, which have been extended until the end of 2023, will result in a significant supply shortfall in the fourth quarter of the year.
OPEC+ began reducing oil production in 2022 with the aim of stabilizing the oil market. As highlighted by Reuters, this month, the price of Brent Crude surpassed $90 per barrel for the first time in 2023 following the decision by OPEC+ leaders Saudi Arabia and Russia to extend their combined daily production cuts of 1.3 million barrels until the end of 2023.
Can crude oil breach the $100 mark?
Experts suggest that there is a potential for crude oil prices to surpass the $100 per barrel mark due to supply reductions and optimism regarding China’s economic recovery.
G. Chokkalingam, Founder and Head of Research at Equinomics Research, expressed the view that it’s quite conceivable for global oil prices to exceed $100 per barrel. He pointed to significant efforts by Saudi Arabia and Russia to limit oil supply and extend supply cut schedules as factors that could push oil prices beyond this psychological threshold. Additionally, Chokkalingam noted that India’s robust GDP growth and recent data from China, indicating its recovery from economic challenges, could further bolster global oil prices in the short term.
However, CARE Ratings, a rating agency, emphasized that historical trends spanning the past two decades reveal that crude oil prices have struggled to maintain levels above $90 per barrel for an extended period unless major wars or disruptions stemming from conflicts occurred. CARE Ratings stated that even in cases where international crude oil prices temporarily exceeded this mark, corrections typically followed.
Taking these circumstances into account, CARE Ratings suggested that Brent Crude prices are likely to remain within an average range of $87 to $92 per barrel for the remainder of the financial year, unless unexpected significant risks materialize.
Rahul Kalantri, VP of commodities at Mehta Equities, shared the perspective that Brent Crude might surpass the $100 level but cautioned that such a price level may not be sustainable. He cited a recent substantial increase of approximately 30-35% in crude oil prices, attributing it to production cuts by OPEC+ countries. Kalantri pointed out that if crude oil remains above $100, it could lead to a sharp rise in global inflation, which would unfavorably affect equity markets, including the Indian equity market. Nevertheless, he expressed a strong belief that oil prices will likely moderate in the coming days.
Impact of higher crude oil prices on the Indian stock market
India is the world’s third-largest consumer of crude oil, importing a significant amount. If crude oil prices go up, it creates fiscal challenges for India. The country’s current account deficit (CAD) can expand, its currency can weaken, and inflation can rise due to higher crude oil prices. This, in turn, can affect investor sentiment in the stock market and lead to foreign portfolio investors (FPIs) selling off their holdings.
CARE Ratings noted that India’s heavy reliance on oil imports, which accounts for around 85% of its needs, means that sustained increases in international crude oil prices can have significant economic consequences. For instance, if India imports about 5 million barrels per day (bpd) of oil, a full-year current account deficit could increase by around 20 basis points (bps). Consequently, CAD could reach 1.8% of GDP if the Indian crude basket averages around $90 per barrel for the rest of the year.
The rating agency believes that the risk of fiscal slippage is limited because oil marketing companies (OMCs) are expected to absorb most of the increased costs from higher global crude prices. However, if global prices remain high for an extended period, the government might decide to share the burden with OMCs.
Chokkalingam, an expert, highlighted that any possibility of oil prices surging beyond $100 per barrel would impact India’s domestic stock markets. This is because the expectation of higher inflation rates would affect market sentiment. Factors like below-average rainfall, sharp increases in rice and pulse prices, along with rising oil prices, could impact market sentiment further. While major stock indices may not suffer greatly, smaller and mid-cap segments, which have risen significantly compared to Sensex and Nifty, could experience more significant corrections and become relatively less attractive.