Brent at 7 years high: how are market, economy and investors impacted
- Oil prices are at their highest levels since 2014,Brent crude hit $88.3 per barrel on Thursday, up 27% since December 1, when it was trading at $69.5.
- Brent has spiked 8 per cent over the past week, rocking stock markets that were otherwise relatively steady in spite of the third wave of Covid-19 across the country.
- Over the last six trading sessions, the benchmark Sensex at the BSE has lost 1,771 points (2.9%) over fresh concerns around inflation, current account deficit, fiscal deficit, and even the currency.
Reasons for rise in Crude oil prices
- Supply side disruptions: caused by attack on fuel trucks in Abu Dhabi by Yemen’s Houthis , tensions between Russia, the world’s second-largest oil producer, and Ukraine and the outage on Iraq-Turkey pipeline
- Growing imbalance between demand and supply: the former did not see the moderation that was initially expected as the Omicron wave began.
- The key oil producing countries have kept supply on a gradually increasing schedule in spite of the sharp increase in global crude prices.
Impact on Indian economy
- The rise in crude prices poses inflationary, fiscal, and external sector risks.
- Crude oil-related products have a direct share of over 9% in the WPI basket and, according to a report by Bank of Baroda chief economist, a 10% increase in crude would lead to an increase of around 0.9% in WPI inflation.
- Rising oil prices will impact the current account deficit which is the difference between the values of goods and services imported and exported.
- The rise in crude oil prices is also expected to increase the subsidy on LPG and kerosene, pushing up the subsidy bill.
Impact on Consumers
- Higher crude prices can result in higher fuel prices for consumers
Impact on investor sentiment and markets
- Investor sentiment has taken a beating over the last few days in line with rising crude prices.
- FPI: Foreign portfolio investors who had invested a net of Rs 3,950 crore until January 11, have turned net sellers over the last seven trading sessions, pulling out a net of Rs 12,825 crore from Indian equities, leading to a fall of nearly 3% in the Sensex.
- Domestic institutional investment has also fallen from Rs 6,919 crore between January 1 and 14, to only Rs 239 crore over the last four trading sessions.
- The rupee has fallen nearly 1% against the dollar over the last week