InvestorQ : Why did the Nifty and the Sensex correct so sharply on Monday?
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Why did the Nifty and the Sensex correct so sharply on Monday?

2 years ago

The sharp correction of nearly 500 points on the Sensex was driven by a sharp rise in oil prices. Brent Crude prices was up by 3.32% on Monday at $74.36/bbl. Let us understand why oil had a negative impact on the Sensex.

Why did oil prices rise so sharply on Monday?

On Saturday late night Donald Trump announced that the relief from Iranian sanctions granted to India, China, Japan and Korea would not be extended beyond 02nd of May. That means India and other countries will not be able to procure oil from Iran and India is currently the second largest buyer of oil from Iran. This would mean that the supply of oil in the global market will come down by 2 million barrels per day and push up prices further. That was the reason oil prices were so sharply higher on Monday.

Why does that affect stock prices?

There are two ways to look at the impact of oil prices on stocks. Firstly, there is the macro impact. Higher oil prices will mean that India has to pay more for imported oil and India currently India relies on imports for 85% of its daily oil needs. That means the trade deficit will widen and the current account deficit will also widen leading to a weakening of the rupee. All these factors will be negative for the stock markets. That is why most of the index heavy weights like banks and autos saw the steepest correction on Monday.

Why did oil stocks correct so much on Monday

Normally, higher oil prices are positive for oil extractors and oil refiners as it improves the value of their inventor and also ensures better realizations. The bigger problem is with the oil marketers. Normally, when oil prices go up, the prices are passed on to the end customer in the form of higher prices of petrol and diesel. However, the government may not want to do that in the midst of election season and hence it may ask the oil marketing companies like HPCL and BPCL to bear the burden. This will dent their profits substantially which is what is putting pressure on their stock prices.