Even though the rise in oil prices could stop the fiscal situation of an economy, rising oil prices – if driven by rising demand / consumption – are positive for equity markets, analysts say. In their recent note, analysts at Jefferies estimate that every $ 10 per barrel (bbl) rise in the price of Brent oil increases India’s trade deficit by around 40-50 points foundation (bps). However, they believe that equity markets should be able to erode the recent spurt.
“$ 70 / bbl of crude would affect 100-120 bps of conventional inventory deficit (CAD). Low-demand domestic demand development would drive CAD to 1.5 percent in fiscal 2021-22 (FY22) compared to more than 0.7 percent this year. However, we still expect a positive balance of payments (BoP) to be around 1.2 per cent as capital accounts (FDI, ECB and NRI investments) should see over $ 80 billion, ”wrote Mahesh Nandurkar, managing director at Jefferies in a recent coalition -authored note by Abhinav Sinha.
Jefferies analyzed three events of crude price spikes – between 2007-08, 2010-11 and 2018-19. While the first two programs were on-demand, the third was largely a procurement event.
“In the first two programs India outperformed the S&P (2-9 per cent) but outperformed emerging markets (EMs) by 12-17 per cent. The rupee also traded against the U.S. dollar in the first two programs (2-7 percent). The third program was the worst for India when the rupee posted a 14 per cent decline against the US dollar and India surpassed the 21 per cent S&P (in USD terms ). With the current crude price spike largely driven by demand, we believe that the output of the first two programs is likely to be similar, ”said Nandurkar and Sinha.
From around $ 35 per barrel on March 13, 2020, Brent oil prices have jumped 91 percent to about $ 67 per barrel now. Prices began to climb in November 2020 economic activity began to build on the news about the effectiveness of COVID vaccines.
For its part, OPEC + continued to maintain production restrictions, with Saudi Arabia taking a unilateral cut of 1 million bpd in addition to its OPEC + quota. In a series of attacks by Yemeni Houthi rebels against Saudi oil infrastructure a few days ago Brent saw a $ 70 per barrel cap.
Meanwhile, BofA Securites has increased their Brent forecast for 2021 by $ 10 to $ 60 per barrel. “Our weight tests show that this remains a double macro threat. Preventing the fiscal deficit, other dimensions remain controlled. We have raised our current account deficit forecast by 30bp to 0.8 per cent of GDP, ”wrote Indranil Sen Gupta, an Indian economist at BofA Securities in a recent co-authored note by Aastha Gudwani.
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