Iran deal to keep crude oil prices in $55-58/bbl range

5% fall in domestic prices of diesel, petrol could impact CPI inflation

Oil markets across the world are expected to remain oversupplied through 2015, following the nuclear deal with Iran. With Iran returning to the world’s oil market in some time, Brent crude is expected to settle at $55-58 a barrel. Such a development would continue to support India’s macroeconomic fundamentals, as risks of imported inflation would abate substantially. Volatile oil prices would have prevented any further rate cuts by the central bank but with Iran signing the deal, the risk abates substantially. Oil analysts believe crude oil prices will come down further in forward markets by $5-10 a barrel, once Iran’s oil hits world markets. Iran is ready to ship 30 million barrels. In 2008, it produced four million barrels a day, which fell to 2.8 million a day in May. According to Edelweiss Securities, the global oil market is already over-supplied, as western and eastern countries compete for market share. The brokerage says Saudi Arabia has conveyed to the Organization of The Petroleum Exporting Countries that it has raised crude oil output to the highest level on record, as the country prepares for the return of regional rival Iran to international markets and for peak summer demand.

Strategists believe a fall in crude prices would have a cascading impact on the economy and financial markets. Bank of America Merrill Lynch says, “A benign price of crude would be a positive for India and we think a further decline could lead to a small rally in the Indian equity markets despite the near-term concerns of earnings and valuations.”

Historically, Indian markets have delivered positive returns whenever oil has dropped by 20 per cent. On 11 occasions, crude oil has corrected by 20 per cent since 1991. On nine of these 11, equity markets have given positive returns. Brent crude is down 16 per cent since May, when it hit $66.37 a barrel. On seven of these 11 instances, Indian equities have outperformed the MSCI Emerging Market Index.

Lower crude oil prices would also impact India’s inflation and current account deficit (CAD). A five per cent fall in domestic prices of diesel and petrol will impact consumer price index-based inflation by 45 basis points. Economists believe the fall in crude prices will make a case for rate cuts. Economists expect CAD to be contained at 1.6 per cent of gross domestic product in FY16. While lower interest rates would benefit leveraged companies, equity strategists also expect the fall in crude to benefit oil marketing companies, as well as Asian Paints, Marico, Hindustan Unilever, Dabur and Godrej Consumer, which use its derivatives as raw material.