Along with the scheduled US Fed meeting, it is crude oil which is directing the markets lately. In the recent meeting of OPEC countries, it was decided that they will not cut the production levels as yet implying the price of crude oil may crash further.
To what level the price of crude oil may settle down i s a big quetion mark because too many variables are involved but already voices of it hitting $20 levels in medium term are in the air.
As mentioned above, one of the reasons for the crash is supply glut due to the resolution of oil producing countries to maintain the supply levels to protect their market share as well as to ease out the lately emerged threat from US which is producing nearly 1/3rd of the OPEC production Surprisingly, although the OPEC strategy has been partially successful in a sense that there has been consistent shutdown of US rigs, the quantum of US shale oil production has not decreased - maybe due to technological advancement.
OPEC members have indicated that if any production level cut has to come in future, it has to come in tandem with non-OPEC oil producing countries also following the suit - a difficult task because inspite of both sides bleeding on fiscal front, none is willing to compromise and instead is focussing upon protecting their market share. To top it all, Iran deal is expected to be fully operational by mid-January and we may see Iran exporting to its full potential by mid-2016.
Lower crude oil prices will encourage deflationary conditions and interestingly, not only may it lead to further stimulus in Eurozone but also it will be one of the major point of discussion during the Fed meeting as inflation is inversely proportional to interest rates - which may lead to Fed rethinking on adopting a hawkish policy.
Another interesting conclusion to look at is with the production levels remaining the same and the prices coming down sharply, surprisingly the consumption levels have not increased. This clearly indicates that the global economy is extremely weak as there is no demand uptick even after the prices having crashed.
As for India, lower crude oil prices are good for macro-economic situation of the country. It will not only lead to lower inflation giving RBI space to pursue with dovish monetary policy but also it will cut down India's import bill as nearly 80 per cent of our crude oil demand is imported.
Fortunately and unlike the other emerging markets or event the developed markets, the weightage of the oil and gas related sector is mere 8.80 per cent in the index Nifty. Hence, lower crude oil prices will not affect our markets directly the way they are affecting other global markets.
Source: http://www.businesstoday.in/opinion/columns/crude-prices-impact-us-federal-reserve-policy-and-financial-markets/story/227115.html
