Demand-driven rise in crude oil prices is good for equity markets: Analysts

Even though the rise in oil prices can strain the fiscal position of an economy, a rise in oil prices – if 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 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 per cent in fiscal 2021-22 (FY22) versus a 0.7 per cent surplus this year. However, we still expect balance of payments (BoP) to be a positive around 1.2 per cent as capital account (FDI, ECB and NRI deposits) should see over $80 billion surplus,” wrote Mahesh Nandurkar, managing director at Jefferies in a recent 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.

“In the first two episodes India outperformed the S&P (2-9 per cent) but underperformed the emerging markets (EMs) by 12-17 per cent. The rupee also appreciated against the US dollar in the first two episodes (2-7 per cent). The third episode was the worst for India when the rupee depreciated 14 per cent against the US dollar and India underperformed the S&P by 21 per cent (in USD terms). With the current crude price spike largely demand led, we believe an outcome similar to first two episodes is likely,” Nandurkar and Sinha said.

From around $35 a barrel on March 13, 2020, Brent oil prices have jumped 91 per cent to around $67 a barrel now. The prices started to climb in November 2020 the economic activity started to pick up on the news of COVID vaccine efficacy.

On its part, OPEC+ continued to keep a cap on its production, with Saudi Arabia taking on a unilateral cut of 1 million bpd in addition to its OPEC+ quota. A series of attacks by the Yemeni Houthi rebels against Saudi oil infrastructure a few days ago saw Brent top $70 a barrel mark.

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.

Meanwhile, BofA Securites has upped its Brent forecast for 2021 by $10 to $60 a barrel. “Our stress tests show that this is still a double macro risk. Barring the fiscal deficit, other metrics remain in control. We have raised our current account deficit forecast by 30bp to 0.8 per cent of GDP,” wrote Indranil Sen Gupta, India economist at BofA Securities in a recent co-authored note with Aastha Gudwani.