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Business News/ Markets / Stock Markets/  Oil price on the rise: Can Crude breach the $100 mark? How will it impact the stock market? - Explained
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Oil price on the rise: Can Crude breach the $100 mark? How will it impact the stock market? - Explained

Crude oil prices near 10-month high, could breach $100 mark due to supply cuts and economic recovery in China. Impact on Indian stock market with increased fiscal deficit, weaker currency, and inflation.

Experts see a possibility of crude oil prices rising above the $100 per barrel level. (Agencies)Premium
Experts see a possibility of crude oil prices rising above the $100 per barrel level. (Agencies)

Crude oil prices are near their 10-month high, boosted by a tighter supply outlook amid the prospects of healthy demand. Crude oil benchmark Brent Crude traded near the $93 a barrel mark on Thursday.

Oil prices have seen sharp gains recently after OPEC and its allies, known as OPEC+, announced the extension of oil output cuts to the end of 2023. Experts believe oil prices can go higher from the current level because of the deficit.

Reuters reported, quoting the International Energy Agency (IEA), that "oil output cuts which Saudi Arabia and Russia have extended to the end of 2023 will mean a substantial market deficit through the fourth quarter".

OPEC+ started cutting output in 2022 to boost the oil market. As Reuters highlighted, this month, Brent Crude went above the $90 a barrel mark for the first time in 2023 after OPEC+ leaders Saudi Arabia and Russia extended their combined 1.3 million barrel per day (bpd) cuts until the end of 2023.

Read more: OPEC reduces 2023 oil demand by 1 lakh bpd to 29 mbpd, Saudi output cut leads to 3 mbpd shortfall

Can crude oil breach the $100 mark?

Experts see a possibility of crude oil prices rising above the $100 per barrel level because of supply cuts and anticipation of economic recovery in China.

"Yes, it is quite possible for the global oil price to breach the $100 mark a barrel. Significant efforts of Saudi Arabia and Russia to curtail oil supply and also extend the schedule of oil supply cuts could lead oil to breach this psychological mark," said G. Chokkalingam, Founder and Head of Research at Equinomics Research.

"Also, the fast GDP growth of India and the latest data points from China which show that China is trying to move past the worst phase of its economy could give a further boost to global prices in the short term," Chokkalingam added.

However, rating agency CARE Ratings underscored that historical trends over the past two decades show that crude oil prices have failed to sustain above the $90 per barrel threshold for a long period unless major war or conflict-induced disruptions occur.

"Even in cases where there is an overshoot in international crude oil prices, historical trends suggest that corrections are likely to follow," CARE Ratings said.

"Given the circumstances, Brent Crude prices will likely maintain an average range between $87 and $92 per barrel for the remainder of the financial year unless unforeseen tail risks materialise," CARE Ratings said.

Rahul Kalantri, VP of commodities at Mehta Equities believes Brent Crude could cross the $100 level but he said it will not sustain above the $100 level.

"Recently we saw a drastic jump of around 30-35 per cent in crude oil prices which was due to production cuts by OPEC+ countries. If crude oil sustains above $100 then global inflation will shoot up sharply which is unfavourably for the equity market including the Indian equity market but we strongly believe that in the coming days, oil prices will cool down," said Kalantri.

Impact of higher crude oil prices on the Indian stock market

India is the world's third-largest consumer of crude oil and it imports a significant amount of crude oil. If crude oil prices rise, it puts pressure on India's fiscal maths. The country's current account deficit (CAD) can widen, its currency can weaken and inflation can shoot up because of a rise in crude oil prices. Naturally, it will impact the stock market sentiment and can trigger a sharp selloff by foreign portfolio investors (FPIs).

"Given India's oil import dependency averages around 85 per cent, sustained upward pressure on international crude oil prices can carry significant macroeconomic implications," CARE Ratings observed.

"Assuming India imports about 5 million bpd of oil, the full-year current account deficit will likely increase by approximately 20 basis points (bps). Consequently, CAD may increase to 1.8 per cent of GDP if the Indian crude basket averages about $90 per barrel for the remainder of the year," CARE Ratings said.

The rating agency expects the risk of fiscal slippage to be limited since oil marketing companies (OMCs) are expected to bear most of the rise in global crude prices. However, it added that if global prices stay higher for longer, the government may decide to partially absorb the increased costs associated with higher global oil prices by sharing the burden with OMCs.

Chokkalingam pointed out that any possibility spurt in oil prices beyond $100 would impact the domestic equity markets as the expectation of a spurt in inflation rate would impact the market sentiments.

"Below normal rainfall, a steep rise in rice prices and anticipated rise in prices of pulses along with oil prices would impact the market sentiment. Broader indices may not fall badly but small and mid-cap segments could correct badly as they have risen three to four times the rise in Sensex and Nifty, making them relatively unattractive," said Chokkalingam.

Read all market-related news here

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 14 Sep 2023, 02:44 PM IST
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