How Rising Crude Oil Prices Impact the Stock Market?

International crude oil prices increased in the last session, marking their largest weekly rise in over a year due to the growing risk of a regional war between Israel and Iran. However, the gains were somewhat restrained after U.S. President Joe Biden advised Israel not to target Iranian oil facilities.

Brent crude futures went up by 43 cents, or 0.6%, to close at $78.05 per barrel, while U.S. West Texas Intermediate crude futures rose by 67 cents, or 0.9%, finishing at $74.38 per barrel. For the week, Brent crude prices climbed more than 8%, the biggest weekly increase since January 2023.

On October 07, 2024, Brent crude price declined 0.35% to $77.78 a barrel, while the US West Texas Intermediate (WTI) crude declined 0.24% to $74.20 a barrel. 

Impact of Rising Crude Prices on the Indian Stock Market

Corporate India is increasingly concerned about the rise in crude oil prices, increased freight costs, and disruptions to shipping routes due to escalating tensions in the Middle East, particularly following Iran’s missile strikes on Israel.

On October 2, 2024, crude oil prices jumped over 3% amid fears that tensions in the Middle East could escalate further, potentially disrupting output from major oil-producing areas after Iran’s significant military action against Israel. According to a Reuters report, Brent crude futures rose to their highest level in a month, increasing by $2.42, or 3.3%, to $75.98 a barrel, while US West Texas Intermediate crude increased by $2.47, or 3.5%, to $72.30.

Sectors Affected by Rising Oil Prices

Paint Industry: Companies such as Asian Paints, Berger Paints, and Nerolac Paints are likely to face higher costs for raw materials that are derived from oil. This increase could reduce their profit margins.

Oil Marketing Companies (OMCs): Companies like Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL), and Hindustan Petroleum Corporation Limited (HPCL) will experience a rise in input costs as crude oil prices increase. This surge in expenses will negatively affect their profits.

Aviation Sector: Airlines, including Interglobe Aviation and SpiceJet, will encounter higher operating costs due to increasing fuel prices. They will need to find a balance in adjusting ticket prices to maintain profitability without driving away customers.

Impact of Higher Crude on India’s Economy

Every $10 increase in oil prices increases India’s current account deficit by 0.55% and raises the consumer price index (CPI) by 0.3%. This is because oil makes up a significant part of the country’s import costs. As a result, foreign reserves may decrease, the value of the rupee may fall, and import costs may rise. These changes can squeeze corporate profits and lead to corrections in the stock market.

What’s Driving Oil Prices Up?

• Israel has vowed to retaliate against Iran for firing missiles at it on October 01, 2024, following the assassination of the leader of Iran-backed Hezbollah a week earlier. Commodity and oil analysts are warning clients about the potential consequences of a wider war in the Middle East.
• Crude oil prices jumped nearly 2% in the last session but then pulled back after U.S. President Biden suggested that, if he were in Israel’s position, he would think about alternatives to attacking Iranian oil facilities. On October 03, 2024, oil prices surged over 5% after Biden confirmed that the U.S. was discussing with Israel whether to support an attack on Iranian energy infrastructure.
• Concerns about oil supply have eased in Libya. According to Reuters, both the eastern-based government and the National Oil Corporation in Tripoli announced on Thursday that all oilfields and export terminals are reopening after resolving a dispute over the leadership of the central bank.

Due to the region’s major impact on global oil supplies and investor sentiment, both gold and crude oil often see increased volatility during times of geopolitical tension, especially in the Middle East.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.