LINKAGES BETWEEN CRUDE OIL & SECONDARY MARKET

By:Kamlesh Yadav

Roll no: 21MBA - IB - 4th Sem

CRUDE OIL ?

Crude oil is the "black stuff" that comes outof the ground, also known as petroleum.

It's made up of a variety of elements likecarbon, hydrogen and sulphur.

However, crude oil in its purest form is oflittle use to anyone. People must refine it inorder to produce energy, a process thatcreates gasoline, diesel fuel, kerosene andother products.

The prices of commodities are always in flux because they depend onworldwide supply and demand.

Crude Oil has been traded in throughout the world and there prices arebehaving like any other commodity as swinging more during shortage andexcessiveness.

SECONDARY MARKET

The secondary market, also called aftermarket, is the financialmarket in which previously issued financial instruments such asstock, bonds, options, and futures are bought and sold.

The term "secondary market" is also used to refer to themarket for any used goods or assets, or an alternative use foran existing product or asset.

After the initial issuance, investors can purchase from otherinvestors in the secondary market.

The major stock exchanges are the most visible example ofliquid secondary markets like BSE, NSE, NYE, LSE

LINKAGES

As an increase in the oil price directly increases the operationalcost, that the profit margin of these companies will decrease. This isthe reason that the buyers have negative impression about thefuture of the companies that are hugely dependent on oil. Thisuncertainty restricts the buyers to invest in these companies and asa result the price of the stocks falls.

On the demand side, oil price increases drive up the general level ofprices, which translates into lower real disposable income, andconsequently reduces demand.

Oil prices also have effects on wage levels, which result in increasedinflation. Inflationary pressures are usually controlled by centralbanks through increase in interest rates. Given the higher interestrates, bond investments will become more attractive than stockinvestments, which will result in lower stock prices.

Correlation

Cor (r)= 0.504385R lies between 0.5 to 0.699, there is a moderate degree of correlation between crude oil prices and stock prices.

MONTH PRICE OF CRUDE OIL NIFTY INDEX

Dec-07 3,527.12 6138.6

Apr-08 4,365.33 5165.9

Aug-08 4,919.52 4360

Dec-08 2,020.10 2979.5

Apr-09 2,517.58 3473.95

Aug-09 3,461.09 4662.1

Dec-09 3,491.65 5201.05

Apr-10 3,744.14 5278

Aug-10 3,533.47 5415.45

Dec-10 4,068.37 6101.85

Apr-11 5,162.95 5749.5

Aug-11 4,548.23 5001

Dec-11 5,488.30 4624.3

Apr-12 5,892.63 5248.15

Aug-12 5,849.31 5315.05

Dec-12 5,536.01 5908.35

Probable Error

P.E(r) = 0.6745* (1-r2)

sqrt(n)

P.E= 0.1257

i) If r < P.E(r), then the value of r is not at all significant

ii) If r > 6P.E(r), then r is definitely significant.

iii) In other situations, nothing can be calculated with certainty.

0.00

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

14,000.00

Dec

-07

Ap

r-0

8

Au

g-0

8

Dec

-08

Ap

r-0

9

Au

g-0

9

Dec

-09

Ap

r-1

0

Au

g-1

0

Dec

-10

Ap

r-1

1

Au

g-1

1

Dec

-11

Ap

r-1

2

Au

g-1

2

Dec

-12

Chart Title

Price of Crude oil Nifty Index