As Brent hits $100, oil intensity ratio in focus
PremiumPast global oil intensity ratio data shows that after an initial fall, stock markets have digested higher oil prices
The repercussions of escalated tensions between Russia and Ukraine have pushed oil prices beyond $100 a barrel, the highest since 2014. There are fears that Russia’s crude oil exports could be hit, causing a disruption in global supplies and thus pushing prices higher.
Global equity investors are worried about faster-than-expected interest rate hikes because of inflation caused by a rise in the prices of crude oil. Understandably, there was mayhem in the stock markets. On Thursday, Russia’s stock market nosedived 50%, key indices in Asian countries of China, Hong Kong, and South Korea fell more than 2% each. India’s Nifty50 saw deeper cuts and ended the day’s session down 4.7%.
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However, investors can calm their nerves by looking at the global oil consumption to global gross domestic product (GDP) ratio. This has breached its long-term average of 3.1 to touch 3.6 so far in 2022, with oil prices at $100 per barrel, according to an analysis by Yes Bank. The ratio, which is also known as the oil intensity ratio and gives an idea of how much oil is consumed per unit of GDP, could rise to 4.3 and 4.7, respectively, if Brent crude hits $120 per barrel and $130 per barrel.
“There has been a knee-jerk reaction in the equity market mainly because of the Russia-Ukraine conflict and its aftermath on crude oil prices. Past data on global oil consumption and GDP ratio shows that after an initial fall, the stock markets have eventually digested higher oil prices," said Hitesh Jain, lead analyst at Yes Securities Ltd. In the case of Sensex, too, as long as the ratio is below five, it is unlikely to cause a long-term market correction, he said. “While it is difficult to predict oil prices, in the past they have seldom remained at elevated levels for long," Jain said.
Nonetheless, given the geopolitical tensions, near-term pressure on oil prices is not ruled out. Sugandha Sachdeva, VP-commodity & currency research, Religare Broking Ltd, foresees Brent and WTI crude prices rising to $110 per barrel and $105 per barrel, respectively.
That said, she points out that revival in talks between Iran and the West for lifting sanctions on Iran oil, and US mid-term elections would cap oil prices beyond the levels mentioned here. “After an immediate spurt, oil prices will likely cool-off," she said.
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In other words, while crude prices have breached a key psychological mark and dampened equity market sentiment, experts are not pressing the panic button yet.
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