The crude oil industry is constantly booming or bursting. The overall rise of economic strength on a global level sees a steep rise in prices, just when supply is outpaced by demand. On the contrary, when supplies are growing at a much higher pace than demand, crude oil sees a fall in its prices. Oil prices have a direct impact on the overall impact of a country, especially that of the US economy. While high oil prices are a driving factor for new job opportunities and make oil companies more economically viable, lower oil prices benefit a number of other industries that are directly dependent on fuel costs.
Both supply and demand for crude oil are affected by the following factors:
· Fluctuations in the US dollar
· The OPEC (Organisation of Petroleum Exporting Countries)
· Supplies required for production and inventory
· Overall global economy
· International deals, treaties, and foreign policies
Effect of falling crude prices on the global capital market
Falling crude oil prices are usually considered to be beneficial for the economy, however, the massive slide in prices this year is mostly due to falling stocks on a global level as well. While the fundamentals of the US economy do not seem to be affected, falling oil prices are a possible forecast of a worsening global growth. The perpetual mismatch between both supply and demand at a very intermediate level is actually the driving factor behind the decline in crude oil prices. While the OPEC (Organisation of Petroleum Exporting Countries) has a history of an induced reduction in supply to facilitate surge pricing, the falling prices very recently are irrespective of the fact that most oil-producing nations including Saudi Arabia are producing oil at extremely high levels.
Emerging markets are seeing a loss in the demand for crude oil; however, the overall global demand is rising. While India and China have been adding to their petroleum reserves, lower gas prices have increased the purchase of vehicles in the US. It has also been noted in the past that falling crude prices have always turned out to be beneficial for at least 70% of the overall economy since consumer spending is directly proportional to lower energy prices. Energy prices play a significant role in the capital market more than they affect the overall economy. Most energy companies are highly dependent on securing more capital and face a constant need to raise financing.
Effect of falling crude oil prices on the Indian economy and capital market
The largest import India currently makes is crude oil. The slightest increase as low as of 1 US dollar in the price of crude, results in almost a 1.2 billion US dollars increase in India’s import bill. Oil has been and continues to remain one of the most important forms of energy consumed by mankind. The prices of oil as an important commodity for mankind continue to fluctuate, and regardless of the inconsistency in either supply or demand, there is no way in which the consumption of oil is going to reduce over the next couple of years. The recent fall in the prices of crude oil has actually helped in the improvement of investment segments in the Indian market.
Here is a lowdown of the factors that explain the effect of falling crude all prices with respect to the Indian capital market:
- Positive impact on India’s CAD (Current Account Deficit) and rupee exchange rate– Since India imports almost 3/4ths of its oil requirements, falling prices will actually have a positive impact on the country’s CAD by lowering the same. The reduced CAD will directly affect the currency of foreign outflow, thereby reducing it. From this arises the possibility of rupee appreciation, therefore directly impacting the cost of imports by making them cheaper. Thus, companies directly or indirectly related to the business of important crude oil benefit, which finally leads to an increase in the prices of their stocks.
- Positive impact on production costs– Any company related to the import of oil or any company who manufactures oil-based products directly benefits from falling crude oil rates. This applies to companies in the business of footwear, refineries, logistics and even airlines as well. The stocks on these companies are affected positively since the input cost of producing any oil-based products are reduced.
- Lower inflation– Since prices of crude oil have a direct impact on the prices of other commodities, the prices of manufactured goods and agricultural products are affected. Fall of oil prices directly lower manufacturing prices for goods, thereby market inflation is considerably reduced or at least kept in check. Inflation is an issue that is negatively perceived by investors almost always, hence lower inflation levels ease both the stock market ad their minds.
- Positive impact on transportation of goods– Most products are manufactured in a single mother hub based in a particular region of the country and are then transported to different parts of India. A fall in the price of crude oil directly lowers down the transportation costs of goods across the country, thereby increasing their demand. Any business that has an increased market demand sees a direct increase in its company’s stock prices.
- Eases fiscal deficit for the government- Fuel is sold at subsidized rates by the government; companies that sell fuel at lower costs are compensated by the government for any loss that they incur. However, this leads to an increase in the funds that the government borrows from the markets- this is what is known as fiscal deficit. A reduction in oil prices is always good news for the government, who can then manage oil subsidies, while not having companies incur losses of any kind.
While the falling oil prices may be beneficial for the country’s economy and the overall stock market, it also has its cons. It directly affects the country’s petroleum producers by affecting export prices. India continues to be the sixth-largest petroleum products’ exporter on a global level and has a lot of overseas trade companies who import petroleum from India. A fall in oil prices may impact their individual economies and lead to a reduction in the demand for products imported from India. A situation like this can directly impact the country’s economy negatively along with companies dealing in petroleum.