Oil's not well: Markets likely to slip on crude oil, shows data

Softening crude oil prices are seen as a big positive for the domestic market, considering India is a major importer of the commodity. 

This has been clearly demonstrated in recent months. Brent crude prices have come off as much as 30 per cent from $124 per barrel in early June to below $90 this month. The benchmark Nifty50 Index during this time frame has jumped as much as 18 per cent.

Will a further drop in oil prices continue to lift stock prices higher? Maybe not, suggests a study done by ICICI Securities (ISec). 

“Crude oil prices and the Nifty returns have a curvilinear correlation, if data over the past two decades is any indication. This implies that below $90-100 per barrel range, crude oil prices and the Nifty’s performance are positively correlated, but the correlation turns negative as prices rise above the said range,” write ISec strategists Vinod Karki and Niraj Karnani in a note. 

With Brent crude hovering over $90 per barrel, stock and oil prices could move in lockstep. As a result, further weakness in oil prices — which will be seen as a sign for a cloudy world economic outlook — could also spell trouble for the stock market. 

“Under a normal supply-side environment, rising or falling crude oil prices reflect a rising or falling aggregate demand environment, providing bullish and bearish signals for equities,” observe the analyst duo.