Want to understand how certain stocks would move next? Follow the oil!
Energy is the corner-stone of our contemporary economy, a requirement for growth and day-to-day life. Though numerous are the sources, crude oil is one that is common worldwide. India, to illustrate, is much dependent on imports and sources more than 80% of its crude oil requirement through imports.
Supply / Demand and its effects
The cost of oil is completely dependent on supply and demand. When oil-producing nations increase their production, prices fall. When they have a shortage, prices rise. This provides these countries with a great deal of control over worldwide oil prices.
When prices of crude oil move, it has a cascading effect throughout the economy. Crude prices directly correlate with transportation cost, and reduced oil results in lesser shipping charges. This results in goods costing less, leaving us with more purchasing power in our wallets. This effect is also seen in the Consumer Price Index (CPI), an important indicator of inflation.
Impact of Stock market investors
For stock market investors, understanding crude oil’s influence is crucial. Many Indian companies, directly or indirectly, feel the impact of crude price changes. Knowing this can help us anticipate how certain stocks will perform.
Consider this: ONGC and Oil India do well when oil prices are high. Likewise, oil marketing companies such as BPCL, HPCL, and IOCL can do well if they bought oil cheaper than what they sell it for. On the other hand, companies such as aviation (Indigo), tyres (MRF), and paint (Asian Paints) consume a lot of oil, so higher crude oil will have a negative impact on these stocks.
Using crude oil as a rough guide can give you good insight and determine whether to buy or sell shares in these industries.
Do you use the price of crude to place bets on any stocks and if so, how? Leave your comments below.