Introduction  

The global economy’s lifeblood is often crude oil, as it powers transportation, manufacturing, and even agriculture. The influence crude oil has with the infusion of renewable energy and electric cars is undeniable.  

For a country like India that imports over 80% of its crude oil, oil prices significantly affect inflation, current account deficit, fiscal deficit, currency valuation, and even the stock market.  

Due to global tensions, OPEC Plus decisions combined with shifting demand, and US shale production, crude oil prices have increased volatility and sent ripples across various sectors. This increases the need for traders and investors to understand the relationship between stock market movements and oil prices.

In this post, we will learn about:

- The importance of crude oil.

- The factors behind crude oil volatility.

- Its influence on various sectors and equities.

- The correlation between crude oil and currencies.

- Important historical examples.

- The strategies traders and investors can adopt using oil data to make portfolio adjustments.

- Projections for 2025.

Why is Crude Oil So Important?

Crude Oil is a strategic commodity in the global economy as it provides critical energy resources throughout the world. It fuels:

- Transportation: petrol, diesel, and aviation fuel.

- Power & heating facilities.

- Petrochemicals: plastics, fertilizers, and even certain pharmaceuticals.

- Lubricants and asphalt for vehicles and roads.

Even if you don’t invest in oil directly, your portfolio is indirectly impacted by it. Why?

Due to the fact that oil fuels:

- Input costs for oil-dependent entities.

- Profit margins triggered by market ebb and flow.

- Consumer discretionary spending.

- Government budget allocations and macroeconomic policies.

- Inflation and interest rates.

What Causes Volatility in the Price of Crude Oil?

The following are linked causes of crude oil price fluctuations

1. Global Identifier: Demand Supply Problem

- Growing economies generate demand.

- Recessions or pandemics result in demand destruction.

Example: Crude went below $0 in 2020 as oil dropped to unprecedented lows due to lack of demand.

 2. OPEC+ Actions

- Opec with friends and foes (Russia) control 40%+ of what is pumped to the world.

- Production decrease or increasements with their masquerade gets havoc.

3. Geopolitical Tensions

Increased unrest—from warfare to sanctions—in oil-rich countries, such as the Middle East, Russia, or Venezuela, limits supply and increases pricing.

For instance, the Russia-Ukraine conflict raised Brent crude to over $120 dollars per barrel.

4. U.S. Dollar Strength

The price of crude oil is cited in United States dollars. As the value of the dollar increases, oil becomes more expensive for other nations, thus lessens demand.

5. Speculation in Futures Market

Institutional investors and hedge funds engage in speculative trading in oil futures.

Their perception-based buying and selling, driven by sentiment, data, and news, results in volatility.

6. Shale Production in the US

In the U.S. shale market, production increases sharply above $70-80 per barrel.

The added supply in the market eventually brings down the price.

India: A Major Oil Importer

As the world's third-largest consumer of oil, India imports over 85% of its crude oil needs.

India’s import bill increases sharply with a dollar adjustment of crude oil pricing.

Increased crude oil prices lead to inflation, declining corporate profit margins, and subsequently, a downturn in the markets.  

To summarize, India's relationship with oil transcends simple energy requirements—also influences and geopolitical and economic dynamics.

Effects of Crude Oil Prices on Indian Stock Market

Let’s categorize the impacts for clarity:  

1. Negative Impact: Oil Price Rise Hurts These Sections  

a) Aviation (Indigo, SpiceJet)  

- ATF (Aviation Turbine Fuel) accounts for 30%-40% of an airline’s operational costs.  

- Increased fuel prices negatively impacts profitability and lowers earnings.  

b) Paints (Asian Paints, Berger Paints)  

- Key input of raw materials for paints such as solvents and resins are derived from crude oil.  

- Their profitability gets hurt when oil price rise as it increases their input cost.  

c) Logistics & Transportation (VRL, TCI, Blue Dart)  

- Increase in diesel prices shrinks profit margins.  

d) Tyres & Rubber (MRF, CEAT, Apollo Tyres)  

- The cost of synthetic rubber and carbon black increases which are crude based inputs.  

e) Oil Marketing Companies (IOC, BPCL, HPCL)  

- If they face limits on cost recovery due to political pressures, their margins get severely impacted.  

- Especially during elections.  

f) Auto Sector (Maruti, Tata Motors)  

- Increased petrol or diesel prices leads to reduced demand for vehicles.  

- Increased cost of transportation.  

2. Positive Impact: Oil Price Rise Benefits These Sectors  

a) Upstream Oil Companies (ONGC, Oil India)  

- Their crude oil production increases revenue and profit during oil price spikes.  

b) Refineries (Reliance, Nayara Energy)

- Refineries profits increase with higher GRMs (gross refining margins) derived from oil price volatility.  

- Complex refiners profit from volatile spreads.

c) Energy Trading & Shipping

- The firms that specialize in trading and moving crude oil are extremely busy.

Crude Oil & Inflation Link in India

- Rising crude oil prices increases transport and shipping costs which leads to inflation.

- To control inflation, RBI may raise the interest rates which is detrimental to equity markets.

RBI's Dilemma:

- While crude oil prices are high, interest rates can not be cut.

- High interest rates lead to less borrowing and slow economic growth which causes a correction in the stock market.

Crude Oil & INR (Currency) Relationship

- Oil is purchased in USD.

- An increase in crude prices means more dollars are needed causing the INR to weaken.

- A weak INR makes imports cost more leading to inflation.

A weaker INR also impacts:

- Returns from Foreign Investments

- Servicing foreign debt of domestic companies

- Earnings of domestic companies whose costs are in USD

Due to these pressures on currency, net FII investment turns negative, leading to declines in Nifty and Sensex.

Historical Case Studies: The Impact of Crude Oil on the Indian Economy

Case 1: 2018 – Crude Oil Prices Between $80 and $85  

- Increased inflation and the rupee value reached 74

- Nifty experienced a ~10% correction.

- OMCs fell sharply due to margin squeeze.  

Case 2: March 2020 – Crude Oil Prices Below $20  

- Global demand during the COVID-19 period ceased to exist.

- OMCs and airline stocks managed to hold their ground, while broader market panic set in, dragging stock prices lower.   

Case 3: February – June 2022 – Russia-Ukraine Conflict  

- Approximately $120+ for Crude oil.

- There was a sharp increase in FDI—India's import bill expanded significantly.

- 82+ levels for the rupee leading to historical lows.

- Intense pressure for active intervention not to cross limits from RBI.  

Recent Trends (2024–2025): Price Projection for Crude Oil  

- Brent crude trading around the $85 to $95 range.

- Continued OPEC+ supply cuts along with tensions in the Middle East are leading to decreased supply.

- Not enough increase in output from US shale production.

- India reducing imports from Russia owing to pressure from sanctions.

- Steadily rising diesel prices in the domestic market.  

Projected Sector Impact by 2025:  

- Increased expenses for airlines—struggling heavily with cost.  

- Tightened OMC position right before key state elections.  

- Strong performance among upstream oil stocks.  

- Currency trading “INR/USD” approximately 83.50.  

Recommended Actions in Response to Crude Volatility Changes

✅ For Traders:  

- Follow and monitor Brent and WTI price fluctuations on TradingView.

- Subscribe for OPEC, EIA and IEA news updates.

- Shift focus to airline, paint or tyre stocks and make trades based on the crude price trend.

* Employ hedged strategies using pairs such as ONGC vs BPCL.

✅ For Investors:  

* During crude spikes, be wary of the paints and auto sectors.  

* If long-term investment strategies remain valid, utilize price corrections to accumulate consumption stocks.  

* Prefer upstream oil equities during uptrends of crude prices.  

* Track USD/INR for clues on the pressure of the currency on the economy.  

Tools to Track Crude Oil Trends  

Tool/Website                                  What You Get  

TradingView                                       Live Brent, WTI charts  

Investing.com                                     API reports, price forecasts  

EIA.gov                                             US inventory and production data  

OPEC.org                                          Production updates, official data  

RBI & SEBI sites                                Currency and macro data for India  

Role of Government & Policy  

When the price of crude oil rises sharply:  

* Government action of reducing excise duty in order to lower fuel retail price.  

* Subsidies on LPG and Kerosene may be reinstated.  

* This leads to increased pressure on fiscal deficit.  

OMCs have to contain stock depreciations - forcing to absorb losses=marginally positive return on stocks.  

The incumbent government becomes more reluctant to reduce retail fuel prices on the backdrop of upcoming elections.  

Factor in these political risks while making investments in these oil-sensitive sectors.  

Conclusion: Crude Oil - The Invisible Force Driving Your Portfolio  

For most stock market participants, the crude oil price is a distant variable. Yet, it remains one of the most important macro factors influencing Indian equities.

Be it intraday stock trading, smallcap investing, or Systematic Investment Plans (SIPs) in mutual funds, the entire ecosystem is impacted by crude oil, albeit indirectly.

From inflation and interest rates to oil and FII behavior — everything revolves around oil at the end.

Thus, as we move into 2025 and later, ensure to:

·Track oil trends systematically  

·Understand sectoral sensitivity  

·Utilize oil news strategically  

·Adjust portfolio to oil hedge when necessary