As per media reports, Israeli warplanes bombed Iran’s embassy in Syria on Monday, April 1. Iran claimed the attack killed seven of its military advisers, including three top commanders. The attack on the Iranian embassy marks a big step up in Israel’s conflict with its adversaries in West Asia. On the following day, Iran said it would take revenge on Israel for the attack.
The fresh flare-up of tensions has raised concerns about potential disruptions in crude oil supply, as Iran is the third-largest producer of crude oil within OPEC (Organization of the Petroleum Exporting Countries).
Crude oil benchmark Brent Crude is now above the $91 per barrel mark. On Friday, Brent crude settled at $91.17 a barrel, rising over 4 per cent for the week.
Apart from geopolitical tensions, healthy economic growth of the US and signs of economic recovery in China have also boosted crude oil prices. This year so far, Brent Crude prices have jumped over 18 per cent.
India is the third-largest consumer and importer of crude oil, importing over 80 per cent of its crude oil needs. An escalation in crude oil prices can disrupt India’s fiscal calculations, damaging the economy, putting pressure on its currency, and negatively impacting foreign capital inflow.
Another important factor is that a sharp rise in crude oil prices will exacerbate persistent inflation and further undermine the likelihood of rate cuts, which are already expected to be delayed and minimal. An increase in inflation would deal a serious blow to market sentiment.
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Crude oil price outlook for short term
The majority of experts expect crude oil prices to move higher in the short term due to supply-related factors and escalating geopolitical tensions. However, crude oil prices could ease in the second half of the year after, near the US elections.
“Short-term outlook for crude oil prices is positive until the second quarter of the year (June Q2) according to global markets.
Stable demand coupled with supply constraints from OPEC & OPEC+ is driving crude oil prices higher. However, a weakness is anticipated in the second half of the year, particularly post-June, as the US is expected to increase production aggressively in the lead-up to the elections,” said Jateen Trivedi, VP and a research analyst at LKP Securities.
Trivedi believes crude oil could rally towards the $90-$94 mark in the short term, but strong resistance is foreseen around these levels based on past price movements in August 2022 and September 2023.
According to V K, Vijayakumar Chief Investment Strategist at Geojit Financial Services, Brent Crude may move in the $89 – 92 range in the short run.
Rahul Kalantri, VP of commodities at Mehta Equities expects crude oil prices to remain volatile to positive bias in the short term due to geopolitical tensions and good macroeconomic numbers from China.
However, he added that due to the US election, the potential upside in the crude oil prices could be limited.
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Kaynat Chainwala, Senior Manager- Commodity Research at Kotak Securities pointed out that during the April JMMC (Joint Ministerial Monitoring Committee) meeting, OPEC extended output cuts till June and asked for better compliance from members like Iraq and UAE pumping above their quotas, further tightening supplies in Q2. At the same time, non-OPEC supply growth is expected to ease this year.
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Chainwala said an escalation in geopolitical tensions has improved the risk premium. With tightening supplies and improving demand, oil prices look constructive for the short term.
Pranav Mer, Vice President, EBG – Commodity and Currency Research at JM Financial Services finds the outlook for oil positive despite Brent inching towards $90, as the global economic activity is showing signs of rebounding and is likely to be led by China and the US, where the recent economic data’s have been encouraging even as the supply side remains a concern due to geopolitical events amid falling fuel inventories in the US.
The underlying trend remains positive and Mer sees Brent oil moving towards $95-$97 and WTI oil towards $90-$92 in the short term.
However, some correction could be seen in crude oil prices since they have already gained significantly.
How can rising crude oil prices affect the Indian stock market?
For now, experts do not see crude oil prices impacting domestic market sentiment. However, they agree that if crude oil prices rise and sustain above the $90 per barrel mark, they can negatively impact the overall market sentiment.
Trivedi of LKP Securities underscored that Indian equities are currently not highly reactive to crude oil price rises, as domestic factors have a stronger influence on fund flows in the market. However, if crude oil prices surge suddenly or start to hold above $95 in WTI, it could negatively affect Indian markets, particularly companies reliant on oil.
Trivedi believes the timing of the Indian elections will keep the focus on domestic politics until around the first week of June, after which the impact of crude oil prices may become more apparent.
Vijayakumar is of the view as long as Brent crude remains in the $89-92 range, it won’t cause any serious problems for India’s macros. But if it crosses $92 and moves beyond $95 it can impact the Indian economy and the rupee will also come under pressure. This will have negative implications for the stock market, too.
As per Kalantri of Mehta Equities, rising crude oil prices may not have a significant impact on the Indian market in the near term as due to the upcoming election, the government will not pass this burden to the public. However, some sectors might be impacted like tyres, paints and some oil companies.
But, if WTI crude oil crosses and sustains above $90 then there could be an adverse impact on the Indian equity market, said Kalantri.
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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 06 Apr 2024, 12:11 PM IST