The oil crash triggered the pullback although the market behavior had thrown indications about it occurring over the last couple of trading sessions. The Bulls were barely staying above the level of 9,000 and every positive move was being met with an equally strong sell-off. All in all, this pullback was only a matter of time.
Intraday, Both the Sensex and Nifty lost more than 3%. Nifty closed below the crucial level of 9,000. Small-mid cap rally was also curtailed with their respective losses of 3.97% and 3.34%
Dr Reddy's (up 4.38%), Bharti Infratel (up 2.89%) and Bharti Airtel (up 2.08%) were the major gainers. IndusInd Bank (down 12.23%), Bajaj Finance (down 9.03%) and ICICI Bank (down 8.18%) were the major losers of the day.
Oil crash: Sellers paying the buyers (ever heard of that?)
Crude Oil WTI (West Texas Intermediate) futures contracts, for the month of May, fell into the negative zone for the first time ever with a price of *-$37/barrel* in the US market. It technically means that producers were paying 37 dollars to buyers to take the excess supply of oil of their hands! Crude prices trading in the negative zone is truly a historic event. Countless wars have been fought to control oil prices but under the current situation, oil is selling literally at a dirt-cheap valuation. These are the signs of a deep recession.
How did this rare phenomenon occur?
The crude oil production has increased by such an extent that the US has now run out of facilities to store the oil.
With lack of storage capacity, the traders started to offload their WTI May contracts which are settled through physical oil delivery. However, the Americans ran out of enough space to store the excess supply as bids dried up in the market, allowing prices to plummet into the negative.
Oil crash: Is India in a position to gain from this?
India, being a large importer of crude oil, could benefit from this crash. Lower crude prices lead to reduced transport costs, keeping inflation in check and allowing the government to subsidize petroleum prices without affecting the tax income. Another option is to enjoy the higher tax income without passing on the cuts to consumers.
Key beneficiaries of lower oil prices could be companies like airlines and paint companies who use crude as a key raw material. It can also benefit oil marketing companies with a lower inventory of previously high-cost inventories while oil producers like ONGC and Oil India are the clear casualties of low oil prices.
The Indian economy is currently under deep slumber with the demand-supply mechanism completely broken. Lack of demand has resulted in oil import going drastically down, nullifying the benefits of slashed oil prices.
India needs to see its economy gather momentum to make any significant gains out of this situation.
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