Indian Equity Bulls Should't Anticipate Further Crude Price Decline

BENGALURU: Oil is in a bear market. Over the past few months, both major crude benchmarks - Brent and Western Texas Intermediate (WTI) - have corrected by over 25-30 percent from their 2014 peak. Interestingly, and as it often happens in the financial markets, the timing of this plunge has surprised many. The fundamental factors behind the drop in oil prices easing - geopolitical tensions, slowing economic growth, especially in the Euro area and China, the Libyan output hitting the supply market again and the U.S shale oil revolution (the dominant factor) — could have been factored in well before and the plunge could have been smoother and more gradual, unlike the kind of capitulation we are witnessing now.

There are winners and losers in the backdrop of falling energy prices. Energy importers such as India stand to gain while producers such as Russia, already hammered by sanctions and a vulnerable currency, are feeling the pinch. Further, if one takes the deflationary environment the developed world, most notably Japan and the Euro zone, are entrapped in into account, one can argue that policymakers would not like to see crude below current levels. The recent move by the Bank of Japan to announce additional quantitative and qualitative (QQE) easing was not only a function of the impact of the sales tax hike on aggregate demand but also the potential impact on domestic inflation via importing cheap oil.

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