Is crude heading towards US $ 10/barrel, StanChart claims

The dipping crude oil prices movement scenario is not coming to an end making some happy and some anxious. The U.S. crude West Texas Intermediate (WTI) was trading at USD 30.66 per barrel on Tuesday touching its 12 year low. The decline is almost 20 per cent since the beginning of the year. Since previous year the prices of  oil declined by more than half from its price at USD 70 per barrel. Global markets are worried about the lower crude oil prices. 

A year and a half ago oil prices were at a all time high around USD 110 per barrel. The predominant reasons behind declining oil prices are soaring oversupply, China's weakening economy, as well as the strong dollar, which makes it more expensive for countries using other currencies to buy oil. Further the Organisation of the Petroleum Exporting Countries (OPEC) also lost its monopoly over the production of crude oil. 

Trading data showed that managed short positions in WTI crude contracts, which would profit from a further fall in prices, are at a record high, implying that many traders expect further falls. 

As a major import material, oil prices play an important role in Indian context. Though, the impact on the Indian equity market is indirect, yet some macroeconomic factors would get impacted. The majority of those macroeconomic factors are in favour pertaining to the Indian context as the country imports oil component proportional to one third of its total import basket. The fiscal deficit; Current Account Deficit (CAD); and inflation will be lower in near term future. Lowering CAD would thus strengthen rupee. 

In the industries depending on oil prices the Oil Marketing Companies (OMCs) are expected to have neutral impact as the diesel prices are market related. However, the refinery companies may witness better refining margins. These companies witnessed good financial numbers because of higher refining margins, and inventory gains during the year. The Gross Refining Margin (GRM) is a major factor while deciding the position of these companies. The GRM of those companies remained steady despite a downfall of crude prices. 

On the other hand, from the oil exploration companies' point of view, the lower crude oil prices will reduce their margins as the minimum cost to explore remains constant. The turnover of the crude oil companies would be focused in the coming months. The aviation sector is the most fascinating sector nowadays as an effect of lowering crude oil prices.

Goldman Sachs and CLSA are expecting crude oil prices to further decline to USD 20 per barrel. Moving further Standard Chartered took the most bearish view, saying prices could drop as low as USD 10 per barrel.