Demand-driven rise in crude oil prices is good for equity markets
Published On: Wednesday, March 10, 2021 | By: Team KnowMyStock
A rise in oil prices – if driven by a surge in demand/consumption – is a positive for equity markets, according to analysts. Analysts at Jefferies estimate that every $10 per barrel (bbl) rise in the Brent oil price raises India’s trade deficit by around 40-50 basis points (bps). Yet, they believe that the equity markets should be able to digest the recent spurt. “A $70/bbl of crude would have a 100-120 bps impact on current account deficit (CAD). Improving domestic demand on a low base would drive CAD to 1.5 percent in fiscal 2021-22 (FY22) versus a 0.7 percent surplus this year. However, we still expect the balance of payments (BoP) to be a positive around 1.2 percent as capital account (FDI, ECB and NRI deposits) should see over $80 billion surpluses,” wrote Mahesh Nandurkar, managing director at Jefferies in a recently co-authored note with Abhinav Sinha.
Jefferies analysed past three episodes of crude price spikes – between 2007-08, 2010-11, and 2018-19. While the first two episodes were demand-driven, the third one was largely a supply event.
G Chokkalingam, founder and chief investment officer at Equinomics Research, too, agrees with Jefferies. Too high or too low oil prices, he says, can have an adverse impact on the economy. India, he believes, will be in a comfortable position as long as oil prices do not cross $80 per barrel mark on the upside.
“Oil above $80/bbl can trigger inflationary pressures, while a dip below $40 can trigger deflation, which is also not good for the Indian economy. The recent rise in oil has been on account of a pick-up in economic activity and cartelisation. Markets have nothing much to worry about till oil does not cross $80/bbl mark,” Chokkalingam says.
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