Correlation between Crude Oil and Equities is Surprising 😯

Crude oil, as we all know, is one of the most important fuel sources and, historically, has contributed to over a third of the world’s energy consumption.

It affects everyone right from the richest to the poorest sections in any economy.

Here’s few other things which are made from Crude oil other than the obvious petroleum and gasoline products :

This infographic aptly describes the size of the oil markets:

Now coming back to what we generally think, for an economy like ours which imports more than 80% of its requirement, It is obvious that higher crude prices puts a huge inflationary pressure on our economy like Current Account Deficit, Rupee Depreciation, rise in Transportation costs, rise in cost of production, the effect of which is felt by every walk of the society (from richest to the poorest section in an economy).

So, whenever there is a fall in crude oil prices, It is fair to believe that it is positive for the Indian Economy (which is correct for sure)

Here comes the interesting part, Will the fall in crude oil prices help Indian Stock Markets? It is a commonly held belief that high oil prices directly and negatively impact Indian markets and low Oil prices positively impacts the market.

But Surprisingly, stocks and crude mostly tend to move in similar directions mostly as both these assets respond to risk sentiment similarly.

Recent examples include the famous crash in crude as well as our markets in 2020 due to Corona and similar fall in brent crude from 85$ to nearly 72$ along with fall in Nifty from 18600 to 17000.

More reading about the same topic :

Crude Vs Nifty: Close Alignment (It is an old article , but the same correlation is still applicable)

How can we analyse correlation of our market with crude oil and use it in our setup while taking any investing/trading decision ? So far, the data suggests that both move in similar direction so it would have made little sense to hope crude falls and nifty goes up. that clearly didn’t work.

But it is also interesting to note that the past may not be a true reflection of what is going to happen in the future. With EV Technology and other renewable energy sources gaining stream , will we finally seeing a decoupling of this positive correlation of crude oil with equity markets and see decoupling of this trend and see rise in markets when crude oil goes down? Only time will tell :slight_smile:

Tell me what do you think about it?

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A while back, I read an article in ET which quotes an analysis undertaken by DSP Mutual Fund. The analysis tries to establish a relationship between India’s merchandize exports and the price of crude oil - due to the fact that “refined petroleum products are the highest single item export for India…”.

While I am not sure whether our exports of refined petroleum products have a bearing on the correlation between crude oil and equities, I feel that this information can be relevant in our decision-making.