What is crude oil?
Crude oil is a non-renewable that is resource extracted from the Earth. It is converted into products such as gasoline, diesel, fuel, and other petroleum products. Since it is nonrenewable and it is consumed at a higher level than its replenishment level.
How does the oil market work?
The oil market works in the same way as the stock market functions. Before that, we need to understand the options of oil trading. So let us understand what are oil futures?
Oil futures are contracts in which the oil is traded at a set amount of quantity for a set price at the set time. The trading happens on futures exchanges and is a common method of buying and selling oil. The trader has to take delivery of the oil once the contract expires. He can nullify the contract only with a buy trade. Oil futures are just traded like shares but in the form of oil benchmarks. The two most popular oil benchmarks are Brent Crude and West Texas Intermediate (WTI). They are traded on the Intercontinental Exchange (ICE) and New York Mercantile Exchange (NYMEX).
There is another type of oil trading- Oil Options. Oil options provide you the right to buy a set amount of oil before a set date at a set price with no obligation to trade. You can trade without the compulsion of taking the delivery itself.
The traders prefer oil options to protect themselves from the adverse effects of the volatility in oil prices. Instead of storing, buying, and selling the oil, the traders prefer futures contracts and sell it before the contract expires. The traders take advantage of the price movement of the oil prices.
How crude oil price affect the stock market?
The crude oil is an important factor because India is one of the largest importers of oil in the world. Since India is an importer, the fluctuations in crude oil price is going to affect the economy and thestock market. There is an indirect effect of the price fluctuations in oil on the stock market. It is difficult to calculate the intensity of the effect.
The main factors which describe the impact of crude oil price on the stock market are:
Import of oil
India is one of the largest importers of oil in the world. So, the fluctuations in crude oil price is going to have an impact on the economy as a whole, and the GDP of the country.
Cost of production
The industries which use crude oil as raw material for the purpose of production will face an increase in the cost of the production. This will lead to increased prices of goods and laborers’ wage cuts. This will impact the stock prices of these companies.
Inflation (Cost of living)
The increase in crude oil prices will cause Inflation. Because the consumers will have to pay more for the transportation cost. They will spend less on consumer goods & luxury items such as electronics, clothing, etc. The decreased demand will affect the stocks of these companies.
India imports almost 3/4th of its oil needs making it one of the largest importers. The rise in oil prices will lead to an increase in the cost of imports and thus impacting the Current Account Deficit. In simpler terms, we have to pay more money to buy the same product. This will decrease the value of the rupee and thus causing rupee depreciation. When the rupee depreciates, it attracts more foreign direct investments in the country. On the other hand, the fall in crude oil prices will lead to rupee appreciation.
Thus the oil prices have an indirect impact but a significant impact on the stock market
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