Brent $100/bbl

At least, that is what some Wall Street bankers believeimage1 (3)

Over the last 5 years, the Nifty gave returns of 73.86% at a time when Brent crude gave (-26.13%). That is clearly a negative correlation. But, what happens if crude oil was to touch a level of $100/bbl by next year? At least, BOFA thinks that is a distinct possibility! What does that mean for India?

BOFA’s argument on oil

BOFA is, perhaps, the first large Wall Street bank to come out with a $100/bbl target for Brent crude. BOFA’s argument is that crude oil is likely to see higher demand coming from a recovery of growth in developed markets and higher refining throughput. At the same time the OPEC controls on oil supply at 1.8 million bpd are likely to continue. In addition, the recent US decision to walk out of the Iran nuclear deal will mean that Iranian oil will not be able to flood the crude market any longer. BOFA expects Brent to touch $85/bbl by end of 2018 and $100/bbl by 2019.

Is $100/bbl possible?

If you look at the price history of crude oil in the last 40 years, each sharp correction in the price of oil has been followed by a much sharper bounce. Hence technical bounce cannot be ruled out. It also appears like the big shift to alternatives is not happening any time soon. So $100/bbl could happen!

What it means for India?

For India, that is not great news. India still relies on imports for 75% of its daily oil requirements so crude at $100/bbl means higher imported inflation. Also if you look at the Nifty chart above, it has been negatively correlated with oil prices. In the last 1 year when oil prices moved up, the Nifty has held steady in line with global markets. But a level of $100/bbl could mean that Indian equity markets could actually diverge from world markets. If $100/bbl happens, it is surely not great news for India! ©

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