The oil market is especially sensitive even to a hint of expansion or contraction in supply-James Surowiecki. Oil Industry is one of the pillars and backbone of the global economy. It is necessary for the functioning of the entire world. Everything from manufacturing machinery to plastics can be extracted through oil or some byproduct. Crude oil is considered to be one of the most important commodities in the global economy and is usually traded in Multi Commodity Exchange (MCX) market.
It is versatile in its uses and helps industrialized economies. It is understood that oil is a risky investment than any other asset. Many studies show that there exists an inverse relationship between oil prices and stock exchange. It can be said that crude oil is known as a safe investment for stock market analysis. For analysis and proper functioning of the economy of the country, oil is considered a debatable topic. Increase and decrease oil prices have influenced the oil prices of the entire nation and worldwide.
According to facts and figures, Crude Oil increased 10.97 USD/BBL or 23.57% since the beginning of 2019, according to trading on a contract for difference (CFD) that tracks the benchmark market for this commodity.. Also, India imports 86 percent of its annual crude oil requirement.
Increasing Profits of Oil Companies: The higher price of crude and its derivatives may affect the profit margins of many companies. The profit margins are hampered due to high oil prices as companies across sectors including refining, airline, paints, footwear, lubricants, cement and chemicals for whom crude oil are major input costs. Hence, the ability of companies to sustain profitability will depend on their capacity to take viable price hikes.
Causing Inflation to Rising: The rising oil prices have an inflationary effect over the long term and eventually, it creates ripple effects on the economy. The common men feel the pinch in their daily lives, as wages will have to compensate for this rise in inflation. Higher wages can be the reason for inflation because it increases the cost of goods and services produced in a country thus increasing inflation.
Effect on Imports: An exogenous increase in oil prices affects the economy via its impact on the final as well as intermediate demand for oil products. If oil products become more expensive the costs of intermediate products will also increase and this again will lead to increases in the prices of final products.
Crude oil prices have also impact on the exchange rate: The foreign exchange value of a currency may fluctuate, but it does not change the supply and demand fundamentals of oil. If my country’s currency is the dollar and the dollar’s exchange rate falls against the yen, then my rate of consumption is reduced in proportion to the gain of the person who is based in yen. USD has benefited from crude oil’s substantial decline since the energy sector is a significant contributor to U.S. GDP. Countries that depend heavily on crude exports face more economic damage as compared to those with more diverse resources.
A rise in the cost of production:-Companies like tyre industry, lubricants, footwear, refinery, and airlines hugely depend on crude oil prices. Further, products like paints too will benefit from reduced crude oil prices. This is because; most paints used today are oil-based. A fall in crude oil prices affects the input cost of producing these goods. Thus, fall crude oil prices have a positive impact on the stocks of such companies.
The versatile nature of the crude oil has made it an influential and considerate factor in deciding the increase and decrease of stock prices. The price of oil not only affects the stock of oil companies but also the stocks of industries that use it a byproduct of it.
While the exact amount of influence it has on stock prices cannot be calculated, the price of this commodity can increase or decrease the total costs of production of many goods and services. This can affect the number of goods people consume to exchange rate and the level of foreign direct investment which collectively affects the stock prices in an economy. Needless to say, the price of crude oil has the ability to affect the level of investment in the economy and influence stock prices.