Impact of Oil Prices on Indian Equity Markets

Russia and Ukraine's war is gravely affecting the global economy, primarily through trade, finance and macroeconomic channels. Its severity and duration are a serious concern for the global economy.

According to the World Energy Council, Russia produces the third largest quantity of petroleum and liquid fuels globally after the United States and Saudi Arabia. It is also a major crude oil exporter. Russia’s weights in the MSCI Emerging Market Index plummeted in February 2022, and later MSCI announced that its Russia indexes will be reclassified from emerging markets to standalone markets after most global investors confirmed that the Russian equity market is currently uninvestable.

The geopolitical risk associated with the Russia and Ukraine war has contributed to higher and more volatile crude oil prices since mid-January 2022.?Brent oil prices surged to a near 14-year high of $140 due to reports that the US is planning to ban oil imports from Russia to isolate it from the rest of the world. Another factor contributing to rising oil prices is the delay in the return of Iranian crude oil to the global market. After the Russian invasion of Ukraine on February 24th, the price of Brent crude oil and West Texas Intermediate (WTI) crude oil had increased to over $100 per barrel in anticipation of a massive shortage, and has been increasing since then.

(Brent crude oil is a type of crude oil from the North Sea in Northwest Europe, which is commonly used as a global benchmark and West Texas Intermediate (WTI) is U.S. benchmark crude oil.)

In addition to higher petroleum demand, easing of the COVID-19 pandemic and slower crude oil production growth have also contributed to rising crude oil prices.

Impact of oil prices in Indian Markets

India is the third largest oil importing nation in the world and nearly 80% of its oil needs are met by imports, of which nearly 60% is crude oil which accounts for at least 2% of India's annual GDP. In effect, rising crude oil prices affect India's balance of payments, increasing its fiscal or current account deficit, which reduces the probability of a rating upgrade or economic growth.

Crude oil prices adversely affect the rupee, as more money is flowing out of the system to buy dollars in order to make crude payments. The Nomura rating agency determines that every dollar 10 increase in oil prices contributes to a 0.4% increase in India's current account deficit. The price of crude oil fluctuates on the back of geopolitical events such as wars and over a potential disruption of demand and supply and any policies adopted by the OPEC countries, or the middle eastern countries, because they are the major producers. Any economic disruption in the rest of the world or any currency headwinds also makes crude rise.

Rising crude prices are detrimental to India, while falling prices are beneficial. Many major segments of Indian Industry are closely correlated to the Oil price movement, such as aviation industry where aviation fuel which is a specialised type of petroleum-based fuel used to power the aircraft, is the lifeline of the industry. It is also used by many manufacturing industries especially metal and forging industry.

The pace at which the economy is growing increases the need to import more crude to meet the countries industrial as well as domestic requirements. This is due to rising population and consumption. Thus, this increases our import bill and raises our fiscal deficits if the imports are more than exports. This also disrupts our balance of payments and affects our GDP negatively. The fluctuation in crude prices also fuels inflation, since crude is used as fuel by many manufacturing industries, especially the metal and forging industry.????

The byproducts of crude oil include lubricating oil, diesel fuel, jet fuel, petrol, chemical, liquefied petroleum gas, waxes, polishes, bitumen for roads, fuels for ships factories and others include plastics alcohol, medicine, rubber etc. Therefore, related industries get affected with oil prices fluctuations.

The upstream oil sector refers to the exploration and production of crude oil and natural gas for example reliance ONGC, GAIL etc. and the downstream oil sector refers to the refining of crude oil and the selling and distribution of natural gas and products derived from the crude oil for example HPCL, IOC etc., which gives us petrol and diesel for our vehicles. So, tire aviation, paints and plastics have crude as their major raw material. Hence any movement in crude prices effects their bottom line immensely. Upstream and downstream companies are fully dependent on crude for their bottom-line growth.

The Russian invasion of Ukraine has shaken the Indian energy markets in recent days. Crude oil prices in India rose by over 12 % to over $125 per barrel. In Indian rupees, the price was near Rs. 9,609.

As fuel prices and household bills soar, consumers are already feeling the impact of higher fuel costs. Let’s see how Indian Government manage the already worsening scenario and curb the Imported Inflation.