As we approach the end of 2014, one of the year’s biggest stories has been the declining price of oil. On June 20, 2014, Brent was at nearly $115. On November 13, 2014, it fell below $78, a cumulative decline of over 32%.1
Through November 13, 2014, India’s equities, measured by the BSE Sensex, had appreciated more than 30%.2 That is in an environment where broad emerging market equities3 have been basically flat.
India: World’s Fourth-Largest Oil Consumer 4
The bottom line: India uses a lot of oil, but it has very limited oil resources. The country depends on oil imports for more than 70% of its oil needs.5
We believe that, as the price of oil falls, India’s economic growth prospects—and by extension, equity market performance—may improve.
Historical Study: 3-Month 20% Brent Oil Price Declines and SENSEX Performance
The table shows price declines of at least 20% over a three-month period in the price of Brent , since the liberalization of India’s equity markets, and the corresponding three-month performance of the BSE SENSEX.
• Eleven Declines of 20% of More: Since India’s equity markets liberalized in 1991,6 there have been 11 three-month periods where the price of Brent oil has dropped by 20% or more. On eight of these occasions, the following three-month period for the BSE SENSEX delivered a positive return. The average return of all 11 periods was nearly 17%.
• Since August 13, 2014, Brent Oil Has Dropped More Than 25%: While we can never know what the future will bring, we can indicate the historical relationship that India’s equity markets have had with the price of Brent oil. India’s equities could therefore warrant a closer look.
Quantifying the Connections between India & Oil Prices
• Oil Prices to India’s Gross Domestic Product (GDP): A variety of studies have attempted to identify a predictive relationship between the price of oil and the rate of India’s GDP growth. One recent study indicates that, for every $10 drop in the price of a barrel of oil, India’s GDP increases by 0.1%7. While it’s difficult to determine a cause with that degree of precision for the GDP growth rate of an emerging market economy, given that India imports an average of about 2.6 million barrels of oil per day8, the savings can certainly be substantial when oil prices drop.