China's return to oil market fuels fresh fears for Indian stocks
UBS strategist Bhanu Baweja warns that China's return as an oil buyer, combined with disrupted Hormuz supply, could push crude prices sharply higher and hit Indian markets.
The Indian stock market shows no sign of steadying. It has been closing after daily swings, and last week too it ended in the red. A fresh bout of pressure now looks likely, driven largely by shifting global equations, chief among them a rise in crude oil prices, now made worse for India by the entry of a major new player into that market.
Bhanu Baweja, chief global strategist at UBS Investment Bank, has issued a sharp warning on this front. According to him, demand from China has risen even as the flow of oil through the Strait of Hormuz is being disrupted, and this could send oil prices sharply higher. If that happens, stock markets will fall heavily, with a direct and strong impact on Indian markets, since India depends heavily on other countries for its energy needs.
Baweja said that when the Strait of Hormuz was first closed, it appeared oil prices would climb to 200 dollars a barrel. That did not happen, and prices did not hold even at 120 dollars for long. A major reason for this, he said, was China.
Earlier this year China was simply not buying oil, so despite the disruption in supply, stockpiles did not shrink. But the situation has now changed, as China has re-entered the market. Airlines and other companies that had held off buying while waiting for prices to fall will now return as buyers. With supply limited, this directly means prices are bound to rise.
According to Baweja, around 20 million barrels of crude oil and other products used to pass through the Strait of Hormuz daily, but since the disruption there, ships have been moving through covertly, and only about a third of that, roughly 6 million barrels, is currently getting through this route. That means around 14 million barrels of oil are currently unable to pass through this route, and this could put major pressure on the market. This is a risk that investors in both Indian and global markets need to watch closely, Baweja said further. The market also senses that the US administration will not be able to solve this problem on its own. But if pressure builds on the market, it could become easier for the White House to roll back tariffs or other policies.
According to analysts, the stock market is currently performing well, but an undercurrent of fear remains. Despite the rise in oil prices, the market is showing good performance for now, while volatility in equities and currencies is close to its lower range.
Rising oil prices will not just push up fuel costs, they will also significantly raise the cost of naphtha and fertiliser, which could in turn push up food inflation down the line. Analysts said that elevated oil prices are not good for an economy like India's, and if the situation persists, prices could rise soon.
