Why Is Crude Oil Prices Dragging Stock Prices Lower? Here is The Big Connection

It's probably one the worst weeks the Sensex has seen in recent times. A drop of almost 1700 points on the Sensex in one week, is colossal by any stretch of imagination. Only on single day on Thursday investor wealth to the tune of Rs 3 lakh cores was destroyed in the Indian markets.

If Foreign Portfolio Investors (FPIs) can withdraw just about Rs 1120 crores in the cash market on a single day and it can destroy so much of wealth, one wonders what could happen, if there is large scale withdrawal.

The worry right now is that there may be more to come. The one reason for that is crude oil price. So readers might ask, why is crude prices dragging stock prices lower. The connection is this:

Countries like Saudi Arabia and a host of others from Azerbaijan to Venezeuela to Nigeria could go bankrupt, if crude prices continue to stay lower. The real problem is not that though. Countries like Saudi Arabia will run huge budget deficits, if crude prices stay below $30 for long.

Now, when crude prices were trading over $100, countries like Saudi Arabia, UAE have generated huge surpluses and created sovereign funds. Now, with the budgets for these countries go for a complete toss with crude at $30, sovereign wealth funds have began to withdraw money from equity assets.

In the previous quarter, it is believed sovereign wealth funds withdrew money to the tune of $19 billion from equities across the globe. When that happens equities face redemption pressure, which means fund managers across the globe will sell shares at any and every price.

This is one reason why shares are falling and the biggest reason why stock crude prices are pulling down equities. The longer crude oil prices stay at these levels, the more the redemption from oil producing sovereign funds would be.

How much stock prices would fall from here on, depends really on the selling pressure being exerted from sovereign wealth funds. India is no exception and one would be surprised, if the Sensex even hits 20,000 points in the next few months.

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