Can stocks keep rallying with the rise in oil prices— explained
While historical data shows a general positive correlation between oil prices and Indian equities, recent geopolitical events, particularly the Ukraine war, have disrupted this relationship. The shift in dynamics highlights the increasing influence of non-economic factors on financial markets.
Oil prices have always been a significant factor affecting global economies and financial markets. In recent times, the world has been closely monitoring the fluctuations in oil prices, which have the potential to impact equities markets. This article delves into a 15-year data analysis, exploring the correlation between oil prices and Indian equities, with a particular focus on recent events that have challenged traditional patterns.
Looking back at the data from the past 15 years, a consistent trend emerges. For the most part, crude oil prices and Indian equities have exhibited a positive correlation. This means that, broadly speaking, when oil prices rose, so did the equity markets. This relationship held true in several instances, highlighting the interplay between these two critical economic factors.
March 2009 to November 2010:
During this period, both crude oil and the Nifty index experienced a substantial rally. This was a time of recovery following the global financial crisis (GFC).
June to August 2012:
In a relatively short span of three months, both equities and oil prices saw sharp upward movements.
January 2016 to October 2018:
Over a longer stretch, equities and crude oil moved together, gradually increasing in tandem.
March 2020 to October 2021:
Even during the turbulent times of the COVID-19 pandemic, there was a positive correlation. Both Indian equities and crude oil prices climbed higher.
However, the dynamics between oil prices and the Indian equity market shifted significantly after October 2021. This transformation can be attributed to a few distinct instances.
November 2010 to February 2011:
During this four-month period, oil prices rallied, but Indian equities did not follow suit. The equity market actually witnessed a decline, marking one of the early instances of divergence from the traditional correlation.
December 2021 to March 2022:
The Ukraine war played a pivotal role in reshaping this correlation. Brent oil prices surged by a staggering 85 percent due to geopolitical tensions. In contrast, the equity index fell by approximately 7.5 percent during the same period, challenging the notion of a positive correlation.
March 2022 to June 2022:
The Ukraine conflict continued to impact both oil and equities. Another 25 percent rally in oil prices contrasted with a 7 percent decline in the equity market, further undermining the traditional relationship.
The changing dynamics between oil prices and Indian equities post-2021 underscore the influence of geopolitical factors. The Ukraine war, in particular, has raised questions about the previously established positive correlation. The heightened uncertainty and disruption caused by geopolitical events appear to have a more significant impact on these markets than traditional economic factors.
Oil prices edged higher on Wednesday (September 13, 2023), hovering at a new 10-month high hit the previous day, as expectations of tighter global supply and fears of supply disruption in Libya outweighed concerns of slower demand in some countries such as China.
David Lennox, a Resource Analyst at Fat Prophets, said, “We have been sticking with about $90-95 per barrel range. we believe that is probably the upper range.”
For more details, watch the accompanying video
(With inputs from agencies)
(Edited by : C H Unnikrishnan)
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