1.1 inflationary pressure due to which Central bank

1.1 Brief

Crude oil plays a
very significant role in the development of economy of any country. Nowadays
crude oil prices are witnessing a slight rise. Since crude oil is the global
oil that most of the countries uses, so they get significantly affected by
change of prices in the oil market. There are many reasons for change in crude
oil prices like increased
demand from emerging and developing countries, speculative buying and selling,
currency fluctuations and Organization of Petroleum Exporting Countries
(OPEC) is the main influencer of fluctuations in oil prices. OPEC controls
around half of the world’s supply of oil. It decides the production levels to
meet global demand and thereby influences the prices. As India is not the
member country of OPEC so it imports crude oil to meet its basic requirement as
the level of production in India is low. In 2017 India imported 4.83 million
barrels per day of crude oil making the highest record. More imports leads to
increase in cost of production and its affects the expected returns from the
business. The increase in prices puts inflationary pressure due to which
Central bank increases the interest rate making the bonds to look more
lucrative than stocks and thereby stock prices falls. This paper first tries to
analyse the fluctuations of crude oil price in the last ten years (2008-2017) ,finding
out how the major economic turmoil have led to fluctuations in the crude oil
price and secondly the study also finds out that how the change in crude oil
prices affects the stock prices of NSE by taking three particular stocks.

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However before
studying the impact of change in crude oil price on stock prices it is
essential to know about the companies whose stock prices are taken into crude
oil prices

 

·        
ONGC- Oil
and Natural Gas Corporation Limited (ONGC)
is India’s largest oil and gas
exploration and production company. Its production of India’s crude oil is around three-fourth around 77% which
is equal to around one-third of the countries total demand and more than half
of its natural gas.

 

·        
Reliance Industries-It is one of the India’s
largest private sector company. Its headquarters are in Ahmedabad. The area of
business interest lies in producing crude oil. However the company has sooner
or later even started importing crude oil from US.

 

·        
IOC-Indian Oil Corporation (IOC) is one of the Oil Marketing Companies
which has its business interests in refining, pipeline transportation, marketing of petroleum
products, exploration and production of crude oil, natural gas and petrochemicals.

 

1.2 Objectives

·        
To study the fluctuations in crude oil price in
the last ten years (2008-2017).

·        
To analyse the impact of change in crude oil
price on NSE stocks with special reference to ONGC, Reliance Industries and IOC

 

 

 

1.3 Research Hypothesis

a)     
H0  :
There is no significant impact of change in crude oil price on ONGC stock price.

             Ha  :There is significant impact of
change in crude oil price on ONGC stock price.

 

b)     
H0 : There is no significant impact
of change in crude oil price on Reliance Industries stock price.

Ha:
There is significant impact of change in crude oil price on Reliance Industries
stock price

c)     
H0 : There is no significant impact
of change in crude oil price on IOC stock price.

             Ha   : There is significant impact
of change in crude oil price on IOC stock price.

 

 

1.4 Research Methodology

Research methodology deals with a systematic
and scientific methods that can be adopted to solve research problems. The
study deals with quantitative methods of analyzing the secondary data and
concluding them into valuable findings. In the first part the method of trend
analysis is adopted to study the fluctuations that have taken place in crude
oil prices in last ten years (2008-17).

 

For the second part the impact of change in
crude oil prices on NSE stocks with special reference to ONGC, Reliance
Industries and IOC stock prices. To study the impact simple linear regression
were individually run where Crude Oil Price (COP) was taken as an independent variables
whereas ONGC, Reliance Ind. and IOC stock prices are used as dependent
variable.

 

Data
Sources

For the first part the data of Crude Oil
Price for ten years i.e. 2008-2017 is collected from Moneycontrol.com. The data
is available in US dollars on monthly basis for ten years.

 

 While
for the second part the stock prices of ONGC, Reliance Ind. and IOC are
collected from National Stock Exchange of India. The effect of corporate
actions are adjusted in the closing prices. All the selected prices are averaged
monthly.

           

Limitation of the Study

·        
The study was limited to companies’ stock prices and crude
oil prices for the period 2008-2017.

·        
The stock prices are averaged monthly and converted the data
to stationary.

·        
The study was limited to only the historical global events
that happened over the period 2008-2017

Chapter 2: LITERATURE REVIEW

In the emerging market many studies has been
done to analyze impact of crude oil price changes on stock market. In India,
however, only very few studies has been done to show this effect. Some of the
selected studies relevant to the present study are reviewed.

Shaharudin, Samad, Fazilah, Bhat and Sonal
(2009) have analyzed the effect of crude oil price movement on
the stock prices of gas and oil companies in various markets i.e. in US, India
and UK. Using the economic variables like industrial production and interest
over the period of 2003-2008 analysis was conducted. Various statistical test like
variance auto regression, unit root tests, co-integration tests were applied on
ARCH/GARCH models. The results were that oil price vitality has continuous
effect on the stock prices of oil companies that were taken into account for
study.

Ravichandran and Alkhathlan (2010) examined
the impact of crude oil prices on Gulf Cooperation Council (GCC) stock market.
Data used for this study were the NYMEX oil prices and daily stock market
prices for the short period starting from March 2008 to April 2010.The author
has applied Johansen’s Co-integration, VAR and VECM which proved the influence
of oil price change in GCC stock market.

Khan and Salman (2010) tested
the relationship between the stock market returns and the crude oil price with
special reference to BRIC countries. The data had Brent crude oil price
(closing prices) taken from Russian Trading System (RTS Index), Bombay Stock
Exchange (BSE Sensex Index) and Shanghai Stock Exchange (SSE Composite Index)
for the period of seven years i.e. 2003-2010.The technique of co-integration
and the VECM-MGARCH was applied on the data. The result showed that BRICs have
strong stable and long term relationship with Brent Prices. The result also
investigated that the crude oil price and stock market return were co-integrated
in all the markets.

Chung-Rou
Fang (2010) examined
the impact of structural oil price shocks in the BRIC countries –Brazil,
Russia, India and China on the India’s stock market return. The results found
that the oil price shocks have no significant impacts on India’s stock return,
it also concluded that shocks have significantly positive impact on Russia
stock returns while the impact of oil price shocks on China stock return as the
mixed condition between Russia and India. Further the reason of such volatile
returns have been studied by the author. The result was consistent with the
empirical finding.

Chittedi
(2011) founded the long run
relationship between oil prices and stock prices in India. The author made
efforts to know the volatility of stock prices due to volatility of oil prices.
The author used Auto Regressive Distributed Lag (ARDL) Model
as statistical tool. The analysis resulted that there is no significant impact
of change in the oil price on stock prices.

Thai-Ha Le and Youngho Chang (2011) this
study contributes in examining the reaction of stock market to volatility in
stock market in Japan, Malaysia, Singapore and Korea. The analysis has been
done on monthly data over the period 1986-2011.The results show that the
response of stock markets to oil price shocks were very extreme across markets.
In Japan stock market reacted positively, in Malaysia the reaction was negative
while it was unclear for the other two countries.

Pushpa, Chakraborty and Mathur (2011) found
that there is a long term relationships between oil prices and stock market
prices of two big emerging countries of Asia, India and China. Since India and
China were considered to be the major oil consuming market, their stock markets
were highly sensitive to oil price fluctuations. Data was collected from
January 2000 to May 2011 .ADF Test was used to check the stationarity of the
data series. Methods like Johansen co-integration model was used to find out
the co-integration between the oil prices and stock prices of India and China. VECM
as a tool was employed to find the long run relationship between the variables.
The results of the co-integration proved that long run relationship between oil
prices and stock market prices for both the countries existed.

Lis,
B., Nebler, C., & Retzmann, J. (2012) has made efforts to understand if there is impact of oil
prices on the stock returns of automotive companies. The stock returns of US, German
and Japanese car companies and different crude oil price were taken into
consideration. OLS and EGARCH on the data for further analysis. The result was
that the car companies stocks are not impacted by change in oil price but in
the overall market Japanese companies did not show sensitivity at all ,German
and US companies were more sensitive to changing crude oil price in the given
time period.

Asteriou,
D., Dimitras A., & Lendewig A. (2013) this study investigates the impact of oil price
fluctuations on the stock markets and the interest rates from oil importing and
oil exporting countries.  Vector
Autoregressive (VAR) models and pairwise Granger Causality tests were used to
make the data stationary and  to analyse
the short-term relationships among the variable the Johansen approach for
multiple equations applied and also test for integration among the series is applied.
The results showed that there is relationship between stock prices and oil prices,
it was also found out that the impact on oil importing countries is more
significant than on oil exporting countries

 

 

 

 

 

 

 

 

 

 

 

 

Chapter
3: DATA ANALYSIS AND INTERPRETATION

3.1
Trend Analysis of Crude Oil Price

                                                                    
Figure 1 

                                                       

Many researches have indicates that the
fundamentals of demand and supply are important to understand the short run and
long run fluctuations in oil market. The fluctuation studies are helpful for
investors to decide which investment is profitable and which is not. There are
many other factors of fluctuation in prices of oil like increase in demand from developing
countries,

Currency fluctuations-when there is an
increase in US dollar it will be expensive for India to import oil thereby
affecting its demand and price, many weather conditions also decides the prices
and speculative buying and selling also OPEC being the producer of 40% global
oil also fluctuates the prices. The point to note is that the fluctuations in
oil prices is not solely due to financial speculations but majorly due to oil
demand and oil supply. Apart from these there are many disturbances in the
economy that causes the crude oil price to fluctuate, these disruptions are
short-lived because as the production pattern changes around the world the
price also starts reacting accordingly. It was found that many historic global
events had a negative effect on oil prices which further affected the
production process in many countries. Some of the events were US Subprime
crisis and the following global recession (2008) the crude oil price fell from
$101.84 a barrel to $41.34 a barrel (as shown in fig 1), The Arab Spring
(2011-12) made the crude oil price to touch $100 a barrel. In May, 2011 due to
flooding of Mississippi River the oil prices fluctuated. In 2014 OPEC vowed to
keep crude oil price above $100 a barrel foresightening the future but in mid-2014,
the price of oil began to fell from $100 a barrel to be touching $36 a barrel
.The reason for availability of cheap oil was OPEC as it did not allow to cut
oil production as a result the prices started to dwindle. Even post
demonetization and GST the crude oil price recovery was sluggish. Thus this
historical global events have majorly impacted the crude oil price, the
recovery from which is still continuing.

3.2 Crude Oil Price and Stock Market (NSE)

In
the first objective the reasons of fluctuations in crude oil price are observed
and since crude oil price is used in production at a global level. So the
fluctuations in oil prices changes the cost of production and thereby affecting
the expected rate of return from the business which is shown in the form of
dampen losses. The consumers demand are also tied with oil prices, when the oil
price increases people demand less as a result there are low revenues for the
company. Company experiences increased expenses and decreased revenues thus the
stock prices began to tumble. Since oil is seen to rise costs for every
participant in economy it puts inflationary pressure due to which Central
bank increases the interest rate making the bonds to look more lucrative than
stocks and thereby stock prices falls. So change in crude oil price either directly
or indirectly effects the stock market.

In order to study the
impact of change in crude oil price on NSE stock prices. The stock prices of
three companies ONGC, Reliance Industries and IOC are taken into consideration.
To estimate the impact simple linear regression model is applied over the
period 2008-17 where Crude Oil
Price (COP) was taken as an independent variables whereas ONGC, Reliance Ind.
and IOC stock prices are used as dependent variable.

 

Impact of oil price volatility on ONGC stock price:

The impact of oil
price change on stock price of ONGC is measured with the help of simple linear
regression analysis. The fixed regression model is

                                              Y
= a+ bX

Where, Y=ONGC stock
price, X=Crude Oil Price b=Regression coefficient a=Constant

The results can be
seen from table 1.

                                            
Table 1: Crude Oil Price and ONGC stock price

It could be observed
from table 1 that the correlation is -0.341 which shows negative relationship
between crude oil price and ONGC stock price. To measure the impact of change
in crude oil price on ONGC stock price a hypothesis was framed that “There is
no significant impact of change in crude oil price on ONGC stock price”. To
test the above hypothesis regression tools were used.

The regression
coefficient of oil prices has negative impact on ONGC stock prices i.e. 1% of
change in crude oil price will bring about -0.702% change in 0NGC stock price
keeping other variables constant. As the P-value is less than 0.05 level of
significance thereby the model is significant and the null hypothesis will be
rejected which means the change in crude oil price will have impact on ONGC
stock prices.

 

Impact of oil price volatility on Reliance
Industries stock price:

The impact of oil
price change on stock price of Reliance Industries is measured with the help of
simple linear regression analysis. The fixed regression model is

                                              Y
= a+ bX

Where, Y= Reliance Industries
stock price, X=Crude Oil Price b=Regression coefficient a=Constant

The results can be
seen from table 2.

                                            
Table 2: Crude Oil Price and Reliance Industries stock price

It could be observed
from table 2 that the correlation is -0.227 which shows negative relationship
between crude oil price and Reliance Industries stock price. To measure the
impact of change in crude oil price on Reliance Industries stock price a
hypothesis was framed that “There is no significant impact of change in crude
oil price on Reliance Industries stock price”. To test the above hypothesis
regression tools were used.

The regression
coefficient of oil prices has negative impact on Reliance Industries stock
prices i.e. 1% of change in crude oil price will bring about -3.9% change in
Reliance Industries stock price keeping other variables constant. As the
P-value is less than 0.05 level of significance thereby the model is
significant and the null hypothesis will be rejected which means the change in
crude oil price will have impact on Reliance Industries stock prices.

 

Impact of oil price volatility on Reliance
Industries stock price:

The impact of oil
price change on stock price of IOC (Indian Oil Corp.) is measured with the help
of simple linear regression analysis. The fixed regression model is

                                              Y
= a+ bX

Where, Y= IOC (Indian
Oil Corp.) stock price, X=Crude Oil Price b=Regression coefficient a=Constant

The results can be
seen from table 3.

                                            
Table 3: Crude Oil Price and IOC stock price

 

 It could be observed from table 3 that the
correlation is -0.548 which shows negative relationship between crude oil price
and IOC stock price. To measure the impact of change in crude oil price on IOC
stock price a hypothesis was framed that “There is no significant impact of
change in crude oil price on IOC stock price”. To test the above hypothesis
regression tools were used.

The regression
coefficient of oil prices has negative impact on IOC stock prices i.e. 1% of
change in crude oil price will bring about -1.7% change in IOC stock price
keeping other variables constant. As the P-value is less than 0.05 level of
significance thereby the model is significant and the null hypothesis will be
rejected which means the change in crude oil price will have impact on IOC
stock prices.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter 4: RESULTS AND CONCLUSION

 

The aim of this study
was to find out the fluctuations of crude oil price and how do these
fluctuations impacts the stock market over a period. Apart from the demand and
supply it was ascertained that there were some historical global socio-economic
events which happened between the time periods which made the crude oil prices
to go volatile. It was also found that the change in crude oil price do affects
the stock market in particular NSE. Three stocks of NSE-ONGC, Reliance
Industries and IOC were taken into consideration to analyse the impact. The
simple linear regression model resulted that the change in crude oil price will
have significant impact on the stock prices of the three companies. This study
doesn’t taken in all the fluctuations happening in stock market and are related
to oil prices. Therefore ,scope of further study is left in analysing the
impact of other macro-economic factors affecting the value of stocks in Indian
as well as global stock markets.