A rally in crude oil is definitely good for equity markets, not just in India but across the globe. But a rally beyond $50 a barrel could well start hurting Indian macros, which have remain stable compared with other emerging market economies (EMs).
A rally in crude oil prices can be beneficial for exporting nations and negative for importers such as India. India (India) imports close to 80 per cent of crude requirement and any move beyond $50-60 a barrel level will not come as a good news for Finance Minister , who has already committed to follow the fiscal consolidation path and target a fiscal deficit of 3.5 per cent for FY17.
Crude oil prices have already rallied more than 50 per cent they hit 12-year lows of below $30 a barrel earlier in 2016. Oil prices hit six-month highs on Monday.
The Brent crude futures traded flat at $48.96 a barrel in early Asian trade, after having risen 2.4 per cent on Monday, when it rallied to $49.47 earlier, its highest since early November, in a test toward $50, said a report.
“As oil touches $50 a barrel level, India’s honeymoon period on inflation and current account deficit may be over,” Uday Kotak, Executive Vice Chairman & MD, Kotak Mahindra BankBSE -0.02 % said in a tweet on Tuesday. Indian macros need to improve faster as micro tailwinds slow down, he added.
As oil touches 50$ India’s honeymoon on inflation, current account may be over. Micro needs to improve faster as macro tail winds slow down.
— Uday Kotak (@udaykotak) May 17, 2016
Crude oil below $30/barrel was not great news to anybody. Investors should understand that a decline in global commodity prices came as a bad news for oil producing nations such as gulf countries, Brazil, South Africa etc. which were not able to produce oil at break even prices.
Crude oil prices rallied on account of disruptions from a combination of factors such as outage in Nigeria, Venezuelan, the decline in US production and virtually frozen inflows of Canadian crude after wildfires in Alberta’s oil sands region, said a report.
The disruptions triggered a U-turn in the outlook for the oil market from Goldman Sachs , which had long warned of a crash to as low as $20 per barrel. “It cautioned that at around $50 a barrel, supply could flip back into a surplus in the first half of 2017 if exploration and production activity picks up,” the report added.
“As far as India is concerned $50 a barrel is not bad because I think the government has factored in roughly $45 to $50 a barrel. To that extent it might suggest that the world economyis looking up,” Bhaskar Panda, Senior Regional Head – Treasury Advisory, HDFC BankBSE -1.10 % said in an interview with ET Now.
Crude oil at $50 a barrel also means that prices of other commodities will also move higher, demand will pick up and to that extent India will be in a very sweet spot, say, experts. However, a move beyond $50/bbl could spell trouble.
“I just hope that it does not surge beyond $50/bbl because if it goes back anywhere remotely near the levels that we saw in 2014 then we are in great trouble,” he added.