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How will falling crude oil prices affect India. 5 points…

Co-head of Research at Equitymaster Rahul Shah did an editorial yesterday explaining why Sensex could hit an all-time high in August 2022.

Now, one of the key factors behind the short-term recovery is falling crude oil prices.

Crude oil prices are falling amid fears of a recession, supply-demand dynamics, among other reasons.

Today is almost like another day and the price of crude oil is down again.

Currently, they are trading near multi-month lows.

WTI Crude Oil – 1 Year Performance

Data source: Investment.com

Oil prices fell yesterday as recession fears weighed on the demand outlook and data showed a slow rebound in China’s crude imports last month.

China, the world’s top crude oil importer, imported 8.79 million barrels per day (bpd) of crude in July 2022, up from a 4-year low in June 2022. But the level This is still 9.5% lower than a year ago.

If there is no sign of a major demand recovery, it is important for you to know the consequences of falling crude oil prices and their impact on India.

Here are five points to keep in mind.

#1 Inflation

The market doesn’t like high crude oil prices. It raises the prospect of higher inflation and interest rates, as well as reducing consumer spending and corporate profits.

Falling oil prices are helping to ease inflationary pressures. Therefore, crude oil is negatively correlated with the stock market. This is an established fact. Falling oil prices tend to push the stock market higher.

The recent drop in oil prices has solved the problem of the rupee’s devaluation, but we’ll deal with that later.

Rising oil prices lead to higher inflation as prices of most products rise. Gasoline and diesel prices rose and so did food prices.

The situation reversed when crude oil prices fell.

#2 Rupees

Falling oil prices benefit the Indian rupee.

You have seen the effect. From hitting a record high of 80 against the US dollar last month, USDINR is now trading at 79.57. It touched the level of 78.58 earlier this month on August 2.

As crude oil prices rise, the big concern is the cost of Indian imports. The costs of India’s major imports – crude oil, natural gas, minerals, machinery, electrical equipment, household appliances and chemicals – have increased significantly.

This makes inflation in India already high, even more difficult to control.

Currently, the situation is reversing as crude oil is falling in price.

Here are some results of Hindus

We ran a correlation analysis to see the link between crude oil prices and the rupee and Nifty50 over the past 25 years.

We find that when the price of crude oil fluctuates sharply in both directions for a short period of time (say a month), the rupee and the Nifty50 will in many cases move in the opposite direction.

But when considering the extended period of crude oil price decline (lasting several months), the relationship is very weak during crude oil price decline. As crude oil prices continued to rise for several months, the inverse relationship proved true in 2 out of 3 cases.

#3 Super import

A trade deficit is the portion of imports that exceed exports. India’s trade deficit widened to a record $31 billion in July 2022. In the same period last year, the figure was $10 billion.

India is the third largest consumer of crude oil after the US and China. But we import almost 85% of our total crude oil consumption every year.

As a result, falling oil prices help India balance trade.

This is due to moderate imports as crude oil prices fall. This helps to bridge the gap between imports and exports.

In turn, the narrowing trade gap supports the currency.

Here’s an interesting data point from a Economic Times report…

If crude oil prices are at $100, India’s oil trade deficit will be around $140 billion. For every $10 increase in crude oil from $100, India’s oil trade deficit will increase by about $15 billion.

#4 Industry effect

Any sector that uses oil, or its derivatives, will be a direct beneficiary of falling crude oil prices. This is because companies will see their raw material prices drop over time.

What industries are those?

Any company that makes adhesives is heavily dependent on petrochemicals. Their raw material prices will drop drastically.

The second area that is likely to increase profits is plastics and polymers. This is a sector that uses petrochemicals and petroleum derivatives as raw materials. Their raw material prices will also plummet.

The third sector is oil and dye companies.

There are a number of companies that diversify from oil-based paints to water-based paints. Here we are talking purely about oil-based paints. The dye that produces the paint is a petrochemical derivative.

Companies in these sectors will directly benefit and their eventual profits will increase. The selling price is fixed but the price of input materials is decreasing. These sectors will therefore begin to generate above-average returns.

There are other sectors affected as well, but these are the three main sectors affected by the rise and fall in crude oil prices as they have a close working relationship.

Other sectors include the paint industry, the automotive lubricant industry, and airlines that use crude oil as fuel. Fast moving consumer goods (FMCG) will also benefit from lower crude oil prices.

#5 Impact on Green Energy Demand

Renewable energy is the future of the energy industry. India’s leading source of renewable energy has been profitable for multibagger lately.

Whether harnessed from the sun or wind, renewable energy is becoming the power of choice as countries around the globe work to tackle climate change.

But falling crude oil prices are bad news for the green energy industry. At least in the short term.

As crude oil becomes cheaper, cars and airlines will prefer to continue using the oil, which will reduce the need for green energy.

Electric car stocks could be affected as falling oil prices could drive consumers away from such means.

As energy demand will be lower, it could put pressure on already lowest solar prices in the world. Top solar companies in India will be affected.

Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.

This article is provided by Equitymaster.com

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