Following an Israeli assault on the Iranian embassy in Syria, simmering tensions in West Asia have contributed to a sharp increase in crude oil prices in recent days.
According to media sources, on Monday, April 1, Israeli aeroplanes struck Iran’s embassy in Syria. Iran said that three of its senior commanders and seven other military advisors were killed in the strike. Israel’s confrontation with its rivals in West Asia has escalated significantly with the assault on the Iranian embassy. Iran threatened to exact retribution on Israel over the incident the next day.
Iran is the third-largest producer of crude oil among OPEC members; thus, the recent escalation of hostilities has sparked worries about possible interruptions in the supply of crude oil.
The benchmark for crude oil, Brent crude, is now trading at $91 per barrel. Brent oil ended the week up more than 4%, closing at $91.17 a barrel on Friday.
Crude oil prices have increased in addition to geopolitical concerns due to the US’s robust economic growth and China’s encouraging economic indicators. The price of Brent crude has increased by more than 18% so far this year.
With almost 80% of its crude oil requirements imported, India ranks third in both crude oil consumption and imports. An increase in the price of crude oil might throw off India’s fiscal calculations, harming the country’s economy, straining its currency, and deterring foreign investment.
A significant increase in the price of crude oil would worsen ongoing inflation and lessen the chance of rate decreases, which are already anticipated to be gradual and delayed. This is another significant aspect. A rise in inflation would be very detrimental to market sentiment.
Short-term prognosis for the price of crude oil
The majority of analysts predict that supply-related reasons and growing geopolitical tensions will drive up crude oil prices in the near future. But as the US elections approach in the second part of the next year, crude oil prices may start to decline.
“Global markets indicate that the short-term outlook for crude oil prices is positive through the second quarter of the year (June Q2).”
Crude oil prices are rising as a result of OPEC & OPEC+ supply limitations combined with stable demand. But given that the US is predicted to boost output sharply in the run-up to the elections, a weakening is predicted for the second half of the year, especially after June, according to Jateen Trivedi, vice president and research analyst at LKP Securities.
In the medium term, Trivedi thinks crude oil might rise to the $90-$94 range, but based on previous price moves in August 2022 and September 2023, he sees severe resistance around these levels.
As to V K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, the short-term movement of Brent Crude might occur between $89 and $92.
In the medium term, geopolitical concerns and strong macroeconomic data from China could keep crude oil prices fluctuating and positively skewed, according to Rahul Kalantri, vice president of commodities at Mehta Equities.
He did, however, warn that there could not be as much upside in crude oil prices going forward because of the US election.
At the April JMMC (Joint Ministerial Monitoring Committee) meeting, Kaynat Chainwala, Senior Manager-Commodity Research at Kotak Securities, brought attention to the fact that OPEC had asked for better compliance from members such as Iraq and the UAE pumping above their quotas, further tightening supplies in Q2. OPEC had also extended output cuts until June. However, this year’s rise in non-OPEC production is predicted to slow down.
The risk premium has improved, according to Chainwala, as international tensions have increased. Short-term prospects for oil prices are favourable due to decreasing supply and increasing demand.
The outlook for oil is positive, according to Pranav Mer, Vice President, EBG-Commodity and Currency Research at JM Financial Services, even though Brent is creeping closer to $90. He notes that the world economy is likely to be led by China and the US, where recent economic data is encouraging, even though the supply side is still a worry due to geopolitical events and declining US fuel inventories.
Mer believes that the fundamental trend is still good and that, in the near future, WTI and Brent oil prices will move towards $90 and $97, respectively.
However, given their recent large increase, a drop in crude oil prices is possible.
What impact can increasing crude oil prices have on the stock market in India?
Experts believe that the mood of the home market is unaffected by crude oil prices at this moment. They do concur, however, that rising crude oil prices that remain over $90 per barrel have the potential to have a detrimental effect on market mood.
Indian stocks are now less sensitive to increases in the price of crude oil, according to Trivedi of LKP Securities, since local variables have a greater impact on market money flows. But if WTI crude oil prices jump or remain over $95, it can have a detrimental impact on Indian markets, especially on businesses that depend on oil.
According to Trivedi, the scheduling of the Indian elections would prevent domestic politics from taking centre stage until the first week of June, at which point the effects of rising crude oil prices could become more noticeable.
As long as Brent crude stays between $89 and $92, according to Vijayakumar, there won’t be any significant issues for India’s macroeconomic. However, if it rises beyond $95 and surpasses $92, it may have an effect on the Indian economy and put pressure on the rupee. The stock market will also suffer as a result of this.
Rising crude oil prices could not have a big effect on the Indian market in the near future, according to Mehta Equities’ Kalantri, since the government won’t transfer this cost to the people ahead of the election. However, certain industries, such as paints, tyres, and some oil firms, may be affected.
However, according to Kalantri, there can be a negative effect on the Indian equities market if WTI crude oil crosses and stays over $90.