Crude oil at $30 may not be good news for you; here's why
Falling crude oil prices are indeed good for the Indian economy and markets, but too low a price as $30 a barrel is something that investors back home would start getting worried about.
Crude oil price is a major component of the import bill and if the average price goes down, the government saves a lot, which can also help strengthen fiscal position, cool off inflations and bring down cost of commodities, where crude is one of the major raw material component.
Currently, every $1 decrease in crude prices pulls down India's import bill by Rs 6,500 crore and the government's subsidy burden by Rs 900 crore, said media reports.
On Tuesday dipped below $30/bbl for the first time in almost 12 years, but managed to rise above that level in closing trade. The prices have fallen almost 20 per cent since the start of the year, dragged by supply cut and worries about a slowdown in global growth led by China.
Banks such as Goldman Sachs, Bank of America Merrill Lynch (BofA), and Citigroup have all predicted that crude prices could well go towards $20 levels.
"I would start getting worried about too much fall in crude oil prices because so far we have definitely seen a lot of positive impact on the Indian economy, especially in our deficit numbers. A fall in crude prices is good for a net importer country like India, which imports oil to the extent of 80 per cent of the total requirement," Pankaj Sharma, Executive Director, Equirus Securities, said in an interview with ET Now.
"But if we reach a point when these benefits sustains and prices fall further, that would not be a pleasant scenario for India. We have already seen a very big impact on our overall export market," he said.
One of the major reasons to worry for investors across the globe is the fact that a decline in crude prices by over $80 a barrel from the highs of 2014 has impacted global trade, leading to a sharp decline in investment demand.
Project awards in West Asia are muted, and revenue of global industrial players suggests that the sluggishness has continued for around nine quarters now, which has already led to redemption pressure on various sovereign wealth funds.
"Overseas project awards, particularly in West Asia, were relatively mute - possibly given the sharp drop in crude oil prices. Aggregate project awards are down 3 per cent YoY in West Asia to $121 billion (12-month moving average)," brokerage Motilal Oswal said in a report.
A fall in crude oil prices has led to redemption pressure on various emerging market funds and the impact of the same is now being felt in most emerging markets, including India.
"Sovereign wealth funds' allocations to emerging markets (EMs) have reduced considerably. Their allocation to equities, in general, has dropped. Anecdotally we know that there have been some withdrawals, particularly by sovereign wealth funds, from EMs. This trend will continue as long as commodity prices, oil in particular, continue to behave this way," Manishi Raychaudhuri of BNP Paribas, said in an interview with ET Now.
Brent crude average for the quarter was $43.4 a barrel (down 43 per cent/13 per cent YoY/QoQ). The recent fall in prices can be attributed to lower economic growth in emerging markets, primarily China and the Opec decision to not cut production, say experts. The price outlook is still subdued, led by the outlook of additional exports from Iran.
"There is no getting away from this trend and, as a consequence, countries that are economically protected from this turmoil will have to bear the brunt. At least, their equity markets will have to bear the brunt," he said.
Source: The Economic Times