Reasons for Fall in Crude Prices & its Impact on Stock Markets

Contrary to popular belief, the drop in crude oil prices can adversely impact global stock markets, including India."Crude has created a lot of uncertainties in global markets which are adversely impacting the Indian market sentiment. The recent foreign fund sell-off in equities and decline in rupee's value can be attributed to this constant fall in crude prices," said Tirthankar Patnaik, India strategist and head of research of Mizuho Bank. “Hence, free-falling crude poses serious challenges for markets.

Falling crude price means lower incomes for oil-exporting countries. This will slow down global demand, which will have an impact on Indian exports. “Foreign institutional investors have sold equities worth about Rs 1,850 crore in the past four trading sessions in India . The rupee hit a 10-month low of 62.50 against the dollar on Friday, on concerns over slower foreign fund flows” as per a report published in Economic Times on 15th December 2014.

The plunge from a peak of just over $100 per barrel in the early summer to today’s $58 — a massive 42 percent drop in just a few short months, most of which has come in the last 90 days — could make anyone’s head spin.

Global crude prices are on free fall during the last three months. This has resulted in the reduction of petrol and diesel prices in the local market. The price of petrol has come down from Rs.82 to Rs.70 and diesel prices have come down to Rs 55 As per our experience, once the price of any product goes up, it will never come down. Obviously, all of us are curious to know the reasons for the fall in prices, isn’t it? Here are the probable reasons.

Reason 1: Shale Oil production in USA
US is the biggest consumer of oil in the world. They consume 2 times the consumption of China or 6 times the consumption of India. US is also the largest importer of oil in the world. Today, they are trying to find oil in their own country and reduce the imports. (Imagine, if US stops importing oil from the Middle East!)

US is producing oil called Shale Oil. Shale Oil is unconventional oil produced from Oil Shale rock fragments by pyrolysis, hydrogenation or thermal dissolution.

Reason 2: No cut in production and supply of oil
Whenever the prices of oil were falling in the past, the oil producing countries OPEC (Organization of Petrol Exporting Countries) used to cut the production and supply of oil. Thereby, with lower supply, the prices used to stabilize/increase. But this time, they had a meeting at Vienna on 27thNovember and decided (or were undecided) about the no cut in production.

Reason 3: Lower demand in emerging markets
Why the prices of oil go up? It’s simple. The supply of oil is not sufficient to meet the demand. The demand for oil in markets such as China, Brazil, Japan and Europe is weakening. This has led to excess supply of oil than the demand. Whenever the supply is more than the demand, the price of such product falls.

Reason 4: Production has resumed in Libya
One of the oil producing countries Libya underwent a civil war in the recent past. However, the situation started improving in the last couple of months and thus they have resumed supply of crude oil to the market. Similarly, despite the war like situation in Iraq, the oil production has not reduced.

IMPACT
The following stocks get impacted because of the slump in crude oil prices:

1) Oil marketing companies - BPCL, HPCL, and IOC - will face pressure in the near term because of inventory losses, but in the long run lower oil prices will reduce subsidy concerns and benefit these stocks.

2) Auto companies (Maruti Suzuki, Hero MotoCorp, etc.) will benefit as the ownership cost of vehicles will come down because of falling oil prices. According to Nomura, a further Rs 4 per litre fall in petrol prices will lead to annual savings (assuming running of 30 km/day and mileage of 12 km/litre) of around Rs 4,000 for car owners.

3) Tyre companies (Apollo Tyres, MRF, Ceat and JK Tyres) will benefit from higher margins as 30-40 per cent of their raw material costs are linked to crude oil prices.

4) Industrials: Demand for diesel gensets could rise in near term, helping Cummins. Lower diesel prices will benefit Concor as it may lead to a cutback in railway freight rates.

5) Consumer: The biggest gainer will be Asian Paints as a huge chunk of raw materials are linked to crude derivatives, Nomura says. Godrej Consumers, HUL and Emami will benefit from lower prices of packaging materials, which are direct derivatives of crude, the brokerage added.

6) Power utilities such as Tata Power, Adani Enterprise and JSW Steel will benefit if benchmark thermal coal prices fall because of a drop in diesel prices. Reduction in price of diesel is also a positive for mining companies (Coal India). Nomura says fall in fuel oil will benefit private independent power producers where tariffs are not a pass-through (e.g. Adani Enterprises, Reliance Power).

7) Fall in LNG prices will benefit gas-powered power plant operators such as GVK Power, Lanco Infra, GMR Infra, Tata Power, Reliance Power and NTPC.

8) Airline stocks will also benefit as carriers spend nearly 40 per cent of their operating costs for aviation turbine fuel (ATF).

9) Among midcaps, JBF Industries, Bata India, Supreme Industries, V-Guard Industries, Havells India, Nilkamal Industries, Relaxo Footwear, Whirlpool of India will likely be big beneficiaries of the fall in crude prices, says domestic brokerage Nirmal Bang.

10) Finally, upstream companies like Cairn India, which is a pure crude oil play, will be badly hit because of the slump in oil prices. ONGC, Oil India and Reliance Industries will be also negatively impacted too. Nomura says falling crude prices may lead to investment curbs in the Middle East and impact companies such as L&T and Voltas, which have considerable exposure in the region.

Exporters feel that the crude prices may come down to $ 50 per barrel. At least, the prices will be lower for the next 6 months. To put it simply, the petrol price per litre may come down to Rs.55 and the diesel to Rs.40! Inflation may come down to around 4% and the bank lending rates to around 10%, home loan rates to around 8.5%.

Written By
Rohit Kapoor
Email: [email protected]