Concerns over a global recession played a significant role in the previous two days' (Tuesday and Wednesday) steep fall in crude prices, given that the two biggest oil consumers in the world, China and the United States, appeared to be having a gloomy economic outlook, at least for the short term. Rising COVID-19 cases in China also weighed on crude prices.
According to Refinitiv Eikon statistics, the combined drops of Brent and West Texas Intermediate of over 9 percent on Tuesday and Wednesday were the largest two-day losses at the start of a year since 1991.
Recently, China raised its refined oil export quotas amid weak domestic demand for the Q12023, and the US crude inventories surged 3.3 million barrel.
Further, OPEC December crude production was up by 1,20,000 barrels per day (bpd) month-on-month, while Saudi Arabia reduced the February prices for Asia, at 10-month low.
The upward and downward fluctuations in the price of crude oil have an impact on India, which is a net importer of crude oil. India's import bill would climb in response to the increase in crude oil prices, increasing the country's current account deficit (CAD). Let's check the reverse effect on the Indian economy.
Impact of low crude prices on India
Since India imports 80 percent of its crude oil needs, a decline in prices is always very beneficial for the Indian economy. This means if the prices decline, less foreign currency is used to purchase crude oil, benefiting the economy in general.
Secondly, since the end-user industries, such as oil marketing companies, tyre and paint manufacturers, fast-moving consumer goods (FMCG) producers, carbon black and lubricant players, heavily rely on crude oil and its derivatives, a decline in crude oil prices will undoubtedly help them lower their raw material costs.
"Decline in crude oil prices would reduce the cost of long term Liquefied Natural Gas (LNG), which would benefit the consumers. Among the consumers the fertiliser sector is a large consumer and lower price of LNG would reduce subsidy requirements," said Prashant Vasisht, Vice President & Co-Group Head - Corporate Ratings, ICRA Ltd.
However, if crude oil consumption declines continuously, this plainly indicates that the world economy is entering a recession.
Experts believe that a slight decline in the price of crude oil seems good enough, but a continuous decline indicates a recession. It's never particularly beneficial for India or any other country.
"Effectively, our trade deficit also benefits from a 10% drop in crude oil prices. Paint, tyre, FMCG, and specialty chemical companies would have improved corporate earnings in Q4FY23, if not in the quarter that ended in December," said Avinash Gorakshakar, Head - Research, Profitmart Securities.
Most of the companies stock their inventories, and once the old inventories are out, they obviously benefit by the lower price of the crude oil in the coming quarters.
Impact on stocks
On the backdrop of lower crude prices, all the tyre stocks closed higher in Thursday's trade. Balkrishna Industries Ltd, MRF, Apollo Tyres Ltd, and CEAT Ltd closed 2-5.5 percent higher.
Both crude and rubber, two key derivatives used to make tyres, are down. Rubber prices were down about 24 percent from the highs witnessed last April. Crude prices are down 40 percent from the highs of June 2022.
OMCs like Indian Oil Corporation Ltd, Hindustan Petroleum Corporation Ltd, and Bharat Petroleum Corporation Ltd closed 1-2 percent higher today.
Similarly, FMCG stocks such as Hindustan Unilever Ltd, Dabur India Ltd, Godrej Consumer Products Ltd, and Marico Ltd closed 1-3 percent higher in today's trading session.