Crude Oil Near $106: What happens to inflation, rupee and Indian stocks?

Crude oil prices rose on Monday after US President Donald Trump rejected Iran’s proposal linked to reopening the Strait of Hormuz.

Brent crude futures rose USD 1.32, or 1.27 per cent, to USD 105.64 a barrel, while US West Texas Intermediate crude was at USD 93.11 a barrel, up 70 cents, or 0.76 per cent. Brent was quoted at USD 106.34, up 4.51 per cent over one week, while crude oil was at USD 93.447, down 4.83 per cent over the week.

Iran had offered to reopen the Strait of Hormuz within seven days if the US accepted certain conditions. Trump rejected the proposal.

Trump has also said that further bombing of Iran could take place after the November mid-term elections. Iran’s president said the country could allow UN nuclear inspectors to inspect its nuclear facilities. Iran’s foreign minister also said Tehran was waiting for an official US response on its proposal to open the Strait of Hormuz.

The US said Iran’s proposal included sanctions relief and access to frozen assets before negotiations on its nuclear programme. Iran disputed the US description of the proposal.

Trump has said oil prices would fall sharply if the conflict ends. He also said military strikes before the US mid-term elections remain possible.

Crude oil has become a key indicator for the equity market amid the US-Iran conflict.

Crude was around USD 106 a barrel, and a sustained rise in oil prices could keep pressure on markets. If crude moves towards USD 106-USD 110 a barrel, market pressure could increase. A fall towards USD 102-USD 103 could support some recovery, according to the assessment cited in the material.

The same assessment said Bank Nifty could move below 55,000 and Nifty below 23,000 if crude moves to USD 106-USD 110. The Sensex was at 73,895.74 and the Nifty 50 at 23,140.50.

India’s exposure to higher crude prices comes through oil imports, fuel prices and the wider economy. Higher crude prices increase the cost of oil imports. This can put pressure on the country’s import bill and the rupee.

Higher oil prices can also increase fuel and transportation costs. This can affect companies that use fuel as an input and can increase costs across sectors.

The impact on Indian markets can therefore come through both crude prices and the movement of the rupee. The material identifies crude as a trigger for Indian as well as global markets. Rising crude prices and higher inflation have also increased sensitivity to oil prices in the US market.

The Strait of Hormuz remains a key issue in the oil market because of its role in the movement of oil from the Gulf region. Iran is facing difficulties in exporting oil and has been looking at alternative routes through the Caspian Sea and northern routes. Logistical constraints and a shortage of tankers are also affecting these efforts.

The US said Iran’s proposal to reopen the Strait was linked to demands for sanctions relief and access to frozen funds. Iran said it wanted its assets released and wanted to be able to sell its oil.

The uncertainty over the Strait of Hormuz and the movement of Iranian oil has therefore remained an important factor for crude prices.

The next direction of crude prices will depend on developments in the US-Iran conflict, the Strait of Hormuz and oil exports from the region.

If crude remains around or above USD 106 a barrel, pressure on Indian equities could continue. A move towards USD 106-USD 110 would be watched for further market pressure, while a decline towards USD 102-USD 103 would be a signal for possible market recovery.

For India, the key data points are crude prices, the rupee, inflation and the Nifty and Bank Nifty levels. Trump has said oil prices will fall after the conflict ends. Iran has said it remains ready for diplomacy while also preparing for a possible resumption of the conflict.

The immediate focus for Indian markets remains on whether crude moves higher from current levels or falls towards USD 102-USD 103.