How crude oil prices affect your portfolio?

Hii, the other day, I was just strolling in the market and I stopped by my favorite juice shop to quench my thirst. I ordered myself a Pineapple juice, and I was shocked to know that its price had been hiked by 50 bucks. I asked the shopkeeper about the rise in the price, and he explained that it is because the fruit prices have shot up. 

He went on to explain that, since fuel prices have increased, the cost of transporting fruits and vegetables from farms to markets has increased and hence the rise in prices.

I was awestruck by how crude oil prices can affect different products. Now, anything that affects a business has to affect the stock market as well, right? Because you see, markets have a reputation for being sensitive. Be it a piece of news, war, macro economic instability. They are the first ones to react, so I went on to see if these crude oil price changes affected my portfolio.

So, high crude oil prices may be not good for the economy. Since we rely on imports for crude oil, high prices could widen the fiscal deficit, but they do not really have a negative effect on the stock market.

A look back in the history

If we look back in history and compare NIFTY 50, Rupee, and Crude Oil prices, we find that in a short duration ( one month ), the crude oil prices move in whichever direction, stock markets and the rupee move in the opposite direction. 

But in the long term, the inverse relation is true in two out of three scenarios in the bull run, and none of the scenarios proved an inverse relationship in a bear run of crude oil.

Bull Run of Crude Oil

In 1999, there was an increase in demand for crude oil from countries like China and India which pushed the price of oil by 215 % in 19 months. In the same period. the Nifty gained by 43%, while the rupee depreciated by 9%.

In  2007, when crude oil hit an all-time high of $145 per barrel in a span of 14 months due to tensions between the US and Iran, The Nifty decreased by 4 percent and the Rupee increased by 2.3 percent.

This year, the war between Russia-Ukraine has increased the price of crude oil by 85 per cent in 4 months. Both the rupee and Nifty50 have declined in this period, but not too much.

Bear run of crude oil

The infamous Global financial crisis. which triggered a bear market resulted in  the crash of crude oil prices by 77 per cent from July 2008 to December 2008.  At that time, the Nifty fell by 21 per cent and the Rupee depreciated by 9 per cent.

Another instance when the crude oil price crashed by 75 percent between 2014 and 2016. At that time, the Nifty dropped by 2.7 per cent and the Rupee depreciated by more than 12 per cent.

Next and the most recent fall in crude oil prices was in 2020 due to the pandemic,. the crude oil price crashed by 80 per cent,  the markets also declined along with it, they fell by 21 percent. The Rupee, too, declined by close to 6 per cent. 

So, over an extended period of time, there isn’t really a relationship between crude oil prices and the stock market, because there are a lot of other factors along with crude oil prices that affect the markets. 

One reason which could possibly describe this low correlation could be India’s service sector. The most dominant sector in our economy is the services sector, which doesn’t consume a lot of energy and hence the crude oil prices do not impact the markets much. 

Nonetheless, these high crude oil prices would result in high commodity prices which would affect the margins of companies in sectors such as logistics, FMCG, and energy. So, while high crude oil prices are affecting some of the stocks and the price of my favorite juice, tell me how have they affected you.