At the same time, consumers and businesses, such as fleet owners, who have high fuel costs, will be affected by increased costs. However, a long-term investor need not worry about crude oil cycles.
By Mahavir Kaswa
The Russian invasion of Ukraine’s soil pushed crude oil prices to new highs, most likely due to the pricing of Russia’s supply disruptions in Europe. This is fueling the already hot inflation in the region. From an Indian context, the fear of the ongoing war between Russia and Ukraine is being felt in the stock market. India’s reliance on imported petroleum has indeed increased over the years. For example, in 1998-99, net imports of petroleum products amounted to 69% of total consumption, rising to about 95%  in 2020-21.
Between 1998-99 and 2019-20, India’s GDP grew more than tenfold, while total crude oil imports (by volume) only grew by a factor of 5.5. GDP grew twice as fast as crude oil imports. The driver of this less energy-intensive GDP growth is the nature of the Indian economy. The economic growth is largely due to the service sector (56.59% of GFA 2020-21 (PE)), which consumes less energy.
Stock markets indifference
To further explore the relationship between the price movement of crude oil and the stock market, we looked at the correlation between crude oil and the stock market. Surprisingly, it was only 4%, which hardly implies a relationship.Crude Oil Price Movement vs. SENSEX
We also conducted a time series study to determine when crude oil rallied and nosedive. We then tabulated the stock market returns in the identified periods as follows:
Historically, stock markets have only generated negative returns once in a rough bull run, which is likely an anomaly because the housing bubble (Global Financial Crisis in 2008) had burst by then. In addition, negative stock returns had little to do with high crude prices. Before GFC, crude oil was in a secular uptrend. From January 17, 2002 to January 9, 2008, it was already up 425%, while the stock market was up 514% over the same period.
Likewise, a bear run in crude oil doesn’t necessarily mean phenomenal outperformance or negative stock market returns. Only once in recorded history have we seen the stock market generate negative returns as crude oil prices plunged as it once again coincided with GFC. In all other cases, the stock market generated positive returns in single and lower double digits, in contrast to the widely held belief that a rush in crude oil prices will push stock markets higher.
The nature of the economy is shifting, albeit frosty, and growth is stronger in the low-energy sector of the economy, which insulates the Indian economy from recession. At the same time, consumers and businesses, such as fleet owners, who have high fuel costs, will be affected by increased costs. However, a long-term investor need not worry about crude oil cycles.
(Mahavir Kaswa is Head of Research, Passive Funds at Motilal Oswal AMC. The views expressed are those of the author. Consult your financial advisor before investing)
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