Crude Oil Demand: Brent at $100: What the Oil Demand to Global GDP Ratio Hints at

NEW DELHI: Oil prices may have hit $100 a barrel and sent stocks tumbling today, whether that can materially hurt the outlook for equities is debatable.

Hitesh Jain, principal analyst at YES Securities, said that contrary to common perception, the trajectory of oil prices is not having a significant impact on global equities.

He concluded this after considering the percentage of oil consumed in terms of value relative to total global GDP.

Jain said that world oil consumption (in value terms) as a percentage of GDP varied from 7% during the oil shock of the 1980s to 1% in the late 1990s.

“The vagaries of oil markets have not significantly shaken global market capitalization, with the exception of the global financial crises of 1990 and 2008,” he said. The ratio has averaged 3% over the past 20 years and the current ratio was around 2.6 in 2021. Even if oil averages $100 a barrel, the ratio will still remain benign, a declared YES Securities.

In the event that oil averages $120 a barrel, the ratio may exceed 4, “although there have been several occasions in the past where the ratio as high as 6 has not eroded market capitalization”, Jain said.

Jain told that for India, anything above 5 could be cause for concern.

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So far, the market fears that oil prices could reach $120 a barrel sooner rather than later following new sanctions against Russia.

“The price action is quite orderly, suggesting that the market was positioned for this event. from Europe, and the situation on the ground in the Ukraine is becoming clear. A move above $100 seems inevitable, and I think a Brent move to $120 is not out of the question” , said Jeffrey Halley, senior market analyst, OANDA Asia Pacific.

For India, 2022 started with the worst FII flows recorded in the past four years and mid-cap stocks saw massive swings. From euphoria to slump in four weeks and the pain persists for Indian values.

“Entering and exiting investments with undue reliance on recent performance is likely to lead to excessive trading and lower performance results. Now is the time to review the basics, be confident in India’s long-term potential and stay invested in the same,” YES Securities said in a note.

Steve R. Hansen