The stock market is presently down because crude oil prices are rising.
Rising crude oil prices lead to inflation and have an adverse impact on the Indian economy.
This is the primary reason why share prices are crashing to new 52-week lows.
Edelweiss has conducted a detailed study of the outlook for crude oil prices in Q42018 and the impact on the stock market.
The report has concluded that oil prices will trade with a positive bias in 2019, with WTI possibly averaging in the $80 range and Brent in the $90 range.
It is also stated that from a technical stand-point, in the short-term, oil prices are expected to correct 6-8%, before beginning their new leg higher.
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The recovery off the sub $30 levels has seen WTI oil retracing nearly half of the 2011-2016 bear market decline. The major factors that have contributed to the rally are production cuts by Saudi and Russia, renewed trade sanctions on Iran by the U.S., and a tightening physical market. Besides, positive risk appetite coupled with strong economic dataset from across the globe has also underpinned oil.
Key highlights / Synopsis:
• WTI oil has been trading in backwardation for most of this year, indicating tighter supplies and strong demand. Unless the structure of the curve swings to contango, we believe that supplies will remain tight and as such oil is likely to maintain a positive tone going forward.
• Pipeline bottlenecks in the Permian basin, the largest producer of U.S. shale oil, is likely to slow down the pace of U.S. oil output in 2019. This in turn is likely to offer a strong floor to oil price going forward.
• An end to OPEC production cuts earlier this year has caused the cartel’s spare capacity to decrease to levels not seen for the past few years, which means OPEC could find it difficult to replace lost supplies in case of supply disruptions in any part of the world. This is one of the most bullish factors for oil going forward.
• Demand for oil has started to exceed supply over the past four quarters, suggesting that oil market is getting tighter.
• With U.S. sanctions on Iran looking set to go ahead on November 4th, the key question is how many barrels of oil supplies would be disrupted. With OPEC spare capacity already low, failure to fill this void could significantly underpin prices in the months ahead.
• While supply-side factors are quite bullish for oil, demand-side factors are far from certain. Prevailing trade tensions between U.S. and China and weakness among emerging-markets are key risks that could slow down demand for oil and thereby limit the extent of price rally.
• So far, trade tensions between U.S. and China have not had much negative impact on oil, as demand in either of the nations has not been impacted. However, continued escalation of tensions could start impacting Chinese growth, which in turn could weigh in on oil price too.
• Other than worries over Chinese demand, there are worries over Indian demand too, especially as fuel price in the nation continues to surge and as talks surface that the country could lower its oil imports.
• EIA and OPEC have lowered their global growth estimates for 2019, suggesting that demand for oil could be impacted, especially if prices continue their north-bound journey.
• Overall, we feel that oil prices will trade with a positive bias in 2019, with WTI possibly averaging in the $80 range and Brent in the $90 range. That said, from a technical stand-point, in the short-term, we expect oil prices to correct 6-8%, before beginning their new leg higher.