Does the drop in crude oil prices mark the end of the collapse of Sensex?

A probable trade agreement between the United States and China and the impact of Iran's oil sanctions will affect world prices for crude oil. Photo: AP

Mumbai: Brent crude oil prices, the global benchmark, fell 15% to settle at 72.83 dollars a barrel on Friday, following a recent high of 85.83 dollars a barrel. The decline led to a rebound in the domestic stock markets. Investors hope that lower oil prices will benefit the country's current account deficit, reduce pressure on the rupee and stimulate the return of REITs.

The rupee has recovered some of its losses and bond prices have rebounded as lower oil prices should translate into lower inflation. Add to that a glimmer of hope that a US-China trade agreement could finally be considered and the question is: is the correction of the stock price complete?

Of course, everything depends on maintaining crude oil prices at their current levels. "It is too early to say whether oil prices will continue to correct," said Anubhuti Sahay, chief economist at Standard Chartered Bank.

For the 2019 fiscal year, Standard Chartered expects on average that the price of a barrel of Brent is around $ 75 a barrel and $ 78 a barrel for the fiscal year 2020.

To be sure, there are concerns on request. The International Energy Agency in its Oil Market Report On Oct. 12, its forecast for global oil demand growth in 2018 and 2019 was reduced from 110,000 barrels per day to 1.3 million barrels per day (mb / d) and 1.4 mb / d , respectively.

The agency added that this was due to the worsening economic outlook, trade concerns, rising oil prices and the revision of Chinese data.

In addition, Saudi Arabia's comments that it could produce more crude oil if needed were responsible for breaking the crude oil price rally in recent years.

"If we look at the US inventory data, it seems to suggest that the supply should not be a concern," says Upasna Bhardwaj, economist at Kotak Mahindra Bank.

"Secondly, it seems like some room for maneuver will be left and that the restrictions imposed by the United States on Iran would not be reduced to zero at least immediately."

These factors could well control the sharp rise in oil prices in the near future. The impact of Iran's sanctions on oil markets must be closely monitored. The United States agreed to let eight countries, including Japan, India and South Korea, continue to buy Iranian oil after the reimposition of sanctions against the oil producer of the United States. OPEC on November 5, according to a statement. Bloomberg report, which quotes a senior manager of the administration.

The names of the eight countries that obtained the exemptions should be officially announced on Monday. The conditions of these waivers would be critical, analysts said.

However, Bhardwaj points out that "the Canadian dollar is not only a function of the evolution of oil prices. For macros to improve significantly, non-oil imports must also decline. For now, the correction of oil prices can at best be considered a temporary relief.

"With regard to inflation and the Canadian dollar, if the price of oil were maintained at $ 75 per barrel, the increase in inflation would be gradual; Moreover, we do not see the decline in the CAD of 3% of GDP, "said Sahay.

At the firm level, lower crude oil prices would benefit operating profit margins for companies in a variety of sectors, including tile, plywood, paints and adhesives manufacturers, lubricant manufacturers and shipping companies. marketing of oil. Most of the raw materials used by these companies are crude derivatives.

"For most consumer businesses, the cost of packaging (15% of the raw material) is tied to gross inputs," says a note from Edelweiss Securities Ltd on Nov. 2.

The current drop in crude oil prices will also provide relief to aerospace companies, as their profits have been greatly eroded in recent quarters due to rising fuel costs.

However, it would be unwise to expect a significant improvement in the financial health of airlines at this level of crude prices.

Of course, concerns about the monetary tightening of the US Federal Reserve and world trade persist. But for India, lower crude oil prices are crucial for macroeconomic stability.