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

 From around $35 a barrel on March 13, 2020, Brent oil prices have jumped 91 percent to around $67 a barrel now

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

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