Failed Doha deal a boost for Street

Further spike in crude oil prices, which have gone up 60 per cent since February, could have hurt domestic economy

Collapse of the deal between major oil producers to freeze output and the subsequent fall in crude oil prices could well be a blessing for domestic markets and the economy.

Earlier, a sharp spike in crude oil prices, from this year’s lows, had analysts worried. Any further increase could have begun to hurt earnings of corporates for whom oil is a key raw material.

If the attempt by oil producers to freeze output had been successful on Sunday, oil prices could have extended their recent gains. Brent oil prices have rebounded 60 per cent from their multi-year low of $26.2 a barrel in mid-February to over $40. Failure of the talks saw oil prices tumbling as much as 7 per cent, before staging a slight recovery.

Although global oil prices and the Indian markets have moved in tandem this year, the correlation tends to reverse if oil prices go up sharply. For instance, between June 2014 and January 2015, when oil prices fell from $110 a barrel to $45, the benchmark Sensex rallied from 23,800 to an all-time high of 30,000. Similarly, when oil prices rebounded from their January 2015 levels to nearly $60 a barrel in May 2015, the Sensex had corrected over 10 per cent.

In their latest report, Kotak analysts predict that sudden spike in oil prices could be detrimental to the Indian economy. “Our oil import bill will significantly increase if there is a sudden spike in the prices,” says Dipen Shah, senior vice-president & head of private client group research, ·Kotak Securities. “Our fiscal deficit numbers, which we have assumed a particular level of oil, about $35-$37 per barrel, can get impacted as well.”

Analysts believe if the prices hit $45 per barrel or go above that, then the macroeconomic data points need to be revisited.

“At current levels, oil provides good tailwind to the markets and also is good for the economy. However, if oil prices go up sharply, it will be negative for the markets and it could turn into a headwind,” says Piyush Garg, chief investment officer, ICICI Securities.

Further, sudden spike can also lead to erosion of earnings for a host of companies in consumer goods, textile, plastics, paints and tyre segments. Analysts say if oil prices turn positive on a year-on-year basis, it will be a negative for the market. Currently, oil is hovering around $40 a barrel, compared to $56 a year ago.

However, the dynamics of oil prices and the markets aren’t very simple. A fall in oil prices from $40 a barrel to $26 during the start of the year saw the Indian markets correct by a sharp 12 per cent. A further sharp drop in oil prices, however, could also be bad for the market. As fall in oil prices indicates a slowdown in the global economy, it could spook investors. Also, major oil producing countries are operators of huge sovereign wealth funds which invest in markets like India. Fall in prices could mean scaling back of investments.

“The fall in oil prices can lead to outflow by FII (foreign institutional investors), one of the major factors for FII sell-off last year,” says Garg.

Deal or no deal between oil producers, prices may not fall sharply from current levels, say analysts. “Regardless of the outcome of the meeting, it does look as if the global oil market is gradually heading back towards balance which should help the oil price continue to stabilise,” says Shane Oliver, head of investment strategy at AMP Capital.