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Demand-driven rise in crude oil prices is good for equity markets: Analysts From around $35 a barrel on March 13, 2020, Brent oil prices have jumped 91 percent to around $67 a barrel now
Even though the rise in oil prices can strain the fiscal position of an economy, a rise in oil prices – is driven by a surge in demand/consumption – is a positive for equity markets, say, analysts. In their recent note, analysts at Jefferies estimate that every $10 per barrel (bbl) rise in the Brent oil price raises India’s trade deficit by around 4050 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 analyzed 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. “In the first two episodes, India outperformed the S&P (2-9 percent) but underperformed the emerging markets (EMs) by 12-17 percent. The rupee also appreciated against the US dollar in the first two episodes (2-7 percent). The third episode was the worst for India when the rupee depreciated 14 percent against the US dollar and India underperformed the S&P by 21 percent (in USD terms). With the current crude price spike largely demand-led, we believe an outcome similar to the first two episodes is likely,” Nandurkar and Sinha said