Direct and indirect impact of crude prices on stock markets
The rise in crude oil prices in the first quarter of FY2018-19 had some impact on the global stock markets, including the Indian stock markets. The impact on stock markets is both direct and indirect, but studies have found that there is no predictable correlation between the crude prices and the stock markets. At times, there is a direct correlation between crude oil prices and market movement, but at other times, there is inverse correlation between the two, while many a time, there is no correlation between the movements of crude oil prices and the stock markets.
The companies that are directly impacted by the upward or downward movement of crude prices are the oil exploration and refining and marketing companies. The upstream companies engaged in oil exploration benefit from rise in crude prices as the realisations for their output are higher, while the refining and marketing companies may have to take the brunt if they are not able to pass on the increase in input costs to the consumers. Hence, the stock prices of companies such as ONGC, Oil India, HPCL, BPCL, etc. will be positively or negatively impacted, depending on the upward or downward movement of the crude prices.
Other companies that are directly impacted are the road transport and airline companies engaged in transportation of good and passengers. The rise in prices of aviation fuel, diesel and petrol will increase the cost of fuel for these companies, and if these companies are unable to pass on this increase to the freighters and passengers in the form of increase in freight charges and passenger fares, their increased fuel costs will adversely impact their profits.
The rise in crude prices alsoimpact companies that are engaged in the manufacture of petrochemicals and other allied products such as lubricants, paints, footwear, tyres, chemicals, etc. Sincecrude and its derivatives are major inputs in the production of these products, any rise in crude prices will lead to a rise in their inputs costs, thereby impacting their profitability.
The rise in crude oil prices can have an indirect impact on other sectors of the economy as also on the overall economic growth. Since the costs of transportation of goods and services go up, the prices of goods and services go up, which can lead to an inflationary spiral. To contain inflation, the central bank may raise interest rates, which can lead to a fall in credit to businesses and industries. This can result in decline in investments and, thereby, fall in employment growth. As a result, the economic growth of the country will be impacted.