CHAPTER 1:-INTRODUCTION

Crude Oil Industry

Crude oil is one of the most necessitated worldwide required

commodity. Any slightest fluctuation in crude oil prices can have both direct

and indirect influence on the economy of the countries. The volatility of

crude oil prices drove many companies away and it’s impact the stock

market also.

Crude oil prices act like any other product cost with more

variation taken place during shortage and excess supply. Studies have

conducted to analyze the impact of rise in crude oil price to the economic

growth in the OPEC (Organization of Petroleum Exporting Countries)

countries.

Any massive increase or decrease in crude oil has its impact on the

condition of stock markets in throughout the world. The stock exchanges of

every country keep a close eye on any up and downward movement of the

crude oil price.

India fulfills its major crude oil requirements by importing it from oil

producing nations. India meets more than 80% of its requirement by

importing process. Therefore, any upward and downward motion of prices

are closely tracked in the domestic marketplace. Many times it has been

recorded that prices of essential products like crude also acts as a prime

driver in becoming reason of up and down movement of price.

Any fluctuation in crude oil affects the other industrial segments also.

Higher crude oil price implies to the higher price of energy, which in turns

negatively affects other trading practices that are directly or indirectly

depends on it. Crude Oil has been traded in throughout the world and there

prices are behaving like any other commodity as swinging more during

shortage and excessiveness.

1

In the short term, price of crude oil is influenced by many factors

like socio and political events, status of financial markets, whereas from

medium to long run it is influenced by the fundamentals of demand and

supply which thus results into self price correction mechanism.

There are innumerable factors which influence the price movement

of crude oil in throughout the world. Like methods and technology using for

increase the oil production, storing up of crude oil, changes introduced in tax

policy, social and political issues , demand & supply etc.

The crude oil prices have been buffeted by many factors, which are

summarized as below -

Production:  The OPEC nations are the major producer of world's

crude oil. Therefore, every policy made by such countries related to

the crude oil prices have their influence on crude oil prices. Any

decision taken by OPEC nations for increasing or decreasing production

of crude oil impacts the price level of crude oil in international

commodity markets.

Natural Causes:  In prevent years, global community have witnessed

many events which in turns have volatility effects on the price level of

crude oil. Like hurricane katrina and other type of tropical cyclone have

hit the major portion of globe, which as a result driven the crude oil

prices to reach at its peak.

Inventory:  In throughout the world, oil producers and consumers get

stock their crude oil for their future requirements. This gives rise to

speculation on price expectations and sale chances in case any

unexpected thing cracks during supply and demand equations. Any

upward or downward movement in inventory level shoots up volatility

2

in price index of crude oil, which generates lot of changing movement

in sensex.

Demand & supply:  With a sharp rise in economic demand,

requirement of crude oil is increasing to manifold in context to the

limited supply.

The high demand economies of crude oil are putting undue pressure on

the available fixed resources. The major gap created between demand

and supply of crude oil is forcing the price curve of crude oil to rise in

upward direction.

THE IMPACT ANALYSIS:-

The crude oil price impacts two key aspects of our economy

The import bill:-

Since, we are a net importer of oil. The increasing import bill will widen our

Trade Balance, defined as Exports minus Imports, which has been

perpetually running at a deficit and possibly wipe out our current account

surplus, which is Trade Balance minus Net Invisibles, which has turned

from deficit into surplus over the last few years. Higher trade balance will

3

Price ofCrude oil

P1

P2

0 Q1 Q2 Quantity ofCrude oil

Supply

New equilibrium

Initialequilibrium

D1

D2

3. ...and a higherquantity sold.

2. ...resultingin a higherprice...

1. Increasesthe demand for crude oil..

adversely impact the fiscal deficit, which in turn will impact the

interest rates

Hence, the stock market is impacted

Inflation

Since petroleum products are key constituents of Wholesale and Consumer

Price Inflation Index. Higher import bill directly and indirectly impacts the

rupee,

while inflation impacts interest rates, and hence even the rupee. These

factors obviously affect our GDP growth rates.

All these factors individually and collectively could have a negative

impact on the stock market.

STOCK MARKET:-(SENSEX)

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich

heritage of over 133 years of existence. What is now popularly known as BSE was

established as "The Native Share & Stock Brokers' Association" in 1875.

BSE is the first stock exchange in the country which obtained permanent

recognition (in 1956) from the Government of India under the Securities Contracts

(Regulation) Act (SCRA) 1956. BSE's pivotal and pre-eminent role in the

development of the Indian capital market is widely recognised. It migrated from the

open out-cry system to an online screen-based order driven trading system in 1995.

Earlier an Association Of Persons (AOP), BSE is now a corporatised and

demutualised entity incorporated under the provisions of the Companies Act, 1956,

pursuant to the BSE (Corporatisation and Demutualisation) Scheme, 2005 notified

by the Securities and Exchange Board of India (SEBI). With demutualisation, BSE

has two of world's prominent exchanges, Deutsche Börse and Singapore Exchange,

as its strategic partners.

Over the past 133 years, BSE has facilitated the growth of the Indian corporate

sector by providing it with cost and time efficient access to resources. There is

4

perhaps no major corporate in India which has not sourced BSE's services in raising

resources from the capital market.

Today, BSE is the world's number 1 exchange in terms of the number of listed

companies and the world's 5th in handling of transactions through its electronic

trading system. The companies listed on BSE command a total market capitalization

of USD Trillion 1.06 as of July, 2009.  BSE reaches to over 400 cities and town

nation-wide and has around 4,937 listed companies, with over 7745 scrips being

traded as on 31st July 09.

The BSE Index, SENSEX, is India's first and most popular stock market benchmark

index. Sensex is tracked worldwide. It constitutes 30 stocks representing 12 major

sectors. The SENSEX is constructed on a 'free-float' methodology, and is sensitive to

market movements and market realities. Apart from the SENSEX, BSE offers 23

indices, including 13 sectoral indices. It has entered into an index cooperation

agreement with Deutsche Börse and Singapore Stock Exchange. These agreements

have made SENSEX and other BSE indices available to investors across the globe.

Moreover, Barclays Global Investors (BGI), at Hong Kong, the global leader in ETFs

through its iShares® brand, has created the exchange traded fund (ETF) called

'iShares® BSE SENSEX India Tracker' which tracks the SENSEX. The ETF enables

investors in Hong Kong to take an exposure to the Indian equity market.

The exchange traded funds (ETF) on SENSEX, called "SPIcE" and Kotak SENSEX ETF

are listed on BSE. They bring to the investors a trading tool that can be easily used

for the purposes of investment, trading, hedging and arbitrage. These ETFs allow

small investors to take a long-term view of the market.

 

BSE provides an efficient and transparent market for trading in equity, debt

instruments and derivatives. It has always been at par with the international

standards. The systems and processes are designed to safeguard market integrity

and enhance transparency in operations. BSE is the first exchange in India and the

second in the world to obtain an ISO 9001:2000 certification. It is also the first

exchange in the country and second in the world to receive Information Security

5

Management System Standard BS 7799-2-2002 certification for its BSE On-line

Trading System (BOLT).

BSE continues to innovate. In 2006, it became the first national level stock

exchange to launch its website in Gujarati and Hindi and now Marathi to reach out

to a larger number of investors. It has successfully launched a reporting platform for

corporate bonds in India christened the ICDM or Indian Corporate Debt Market and a

unique ticker-cum-screen aptly named 'BSE Broadcast' which enables information

dissemination to the common man on the street.

 

 

In 2006, BSE launched the Directors Database and ICERS (Indian Corporate

Electronic Reporting System) to facilitate information flow and increase

transparency in the Indian capital market. While the Directors Database

provides a single-point access to information on the boards of directors of

listed companies, the ICERS facilitates the corporates in sharing with BSE

their corporate announcements.

 

Factor Affecting Stockmarket:-

Demand and Supply - This fundamental rule of economics holds good

for the equity market as well. The price is directly affected by the trend of

stock market trading. When more people are buying a certain stock,

the price of that stock increases and when more people are selling he

stock, the price of that particular stock falls. Now it is difficult to predict

the trend of the market but your stock broker can give you fair idea of the

ongoing trend of the market but be careful before you blindly follow the

advice.

News - News is undoubtedly a huge factor when it comes to stock price.

Positive news about a company can increase buying interest in the

market while a negative press release can ruin the prospect of a stock.

Having said that, you must always remember that often times, despite

6

amazingly good news, a stock can show least movement. It is the overall

performance of the company that matters more than news. It is always

wise to take a wait and watch policy in a volatile market or when there is

mixed reaction about a particular stock.

Market Cap - If you are trying to guess the worth of a company from the

price of the stock, you are making a huge mistake. It is the market

capitalization of the company, rather than the stock, that is more

important when it comes to determining the worth of the company.

Earning Per Share - Earning per share is the profit that the company

made per share on the last quarter. It is mandatory for every public

company to publish the quarterly report that states the earning per share

of the company. This is perhaps the most important factor for deciding

the health of any company and they influence the buying tendency in the

market resulting in the increase in the price of that particular stock.

Price/Earning Ratio - Price/Earning ratio or the P/E ratio gives you fair

idea of how a company's share price compares to its earnings. If the price

of the share is too much lower than the earning of the company, the stock

is undervalued and it has the potential to rise in the near future. On the

other hand, if the price is way too much higher than the actual earning of

the company and then the stock is said to overvalued and the price can

fall at any point.

7

CHAPTER 2:- RESEARCH METHODOLOGY

Research Statement : -

“To study the impact of Crude oil price on Stock market

Movement”.

Objective of Study:-

To Study the relation between crude oil price and movement of

Indian stock market.

To study the major Episodes of volatility in Indian stock market and

analyzing the factors or variables like FII ,FDI, INFLATION etc and

their impact on sensex.

Variables :-

Dependent variable is Sensex Independent variables and Sensex price, crude oil and FII.

Methodology:-

1) Sampling:-

8

In order to does the research on movement of stock market (Sensex)

with the movement of crude oil price, FII, FDI, Inflation. We have study the

last three year 1st April 2006 to 31st March 2009.

2) Data Collection:-

To study the market movement we have collected the secondary data

from various sources.

In the present study we have taken the last three year (2006-2009)

BSE-30 (sensex) monthly wise closing data from the BSE.

And the Monthly wise crude oil closing data from the BSE and the

monthly wise crude oil price from the energy information

administration year (2006-2009) and we have taken the monthly wise

FII movement from RBI.

And the past event the stock market information has been taken from

various news bulletins, magazines, journal, and websites.

3) Analysis:

To find out the relation between dependent variable and independent

variable, we have run the regression model with the help of SPSS software

and also we find the correlation between dependent variable and

independent variable, coefficient of variation and T-test by using these

statistical tools we will prove whether all the independent variable impact

the dependent variable or not.

Limitations of the Study:

We can’t conclude that the crude oil price is the only variable which

impacts the stock market. There are many variables like inflation , FII FDI,

9

political issues , government monetary polices etc which are also

Influence the stock market.

Period for the data collection is limited for the study only for the three year data.

CHAPTER 3:- DATA ANALYSIS

OBSERVATION

comparative analyse

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

months

sen

sex

0

20

40

60

80

100

120

140

160

cru

de

oil

pri

ce

SENSEX

CRUDE OIL

From the above graph we can see that as the crude oil price increases the sensex decline.

10

COMPARATIVE ANALYSIS

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

MONTHS

SE

NS

EX

IN

DE

X C

LO

SIN

G

-20000.00

-15000.00

-10000.00

-5000.00

0.00

5000.00

10000.00

15000.00

20000.00

25000.00

FII SENSEX

FII

Comparative analysis between FII and SENSEX HYPOTHESIS TESTING

Let the null hypotheses is

Ho=µ= All the independent variable doesn’t have any impact on stock

market (Sensex).

And Alternative hypothesis is

H1=µ= All the independent variable have impact on stock market (Sensex).

After run the regression model the taking consideration dependent variable

and independent variable we have found the following observation if we

refer the table-1

Variables Entered/Removed(b)

ModelVariables Entered

Variables Removed Method

1SENPRICE, CRUDEOIL,

FII(a). Enter

a All requested variables entered.

11

b Dependent Variable: SENSEX Table-1

Variables entered /removedIn the table 1, we can see that the dependent variable is Sensex and

independent variables and Sensex price, crude oil and FII.

Note:- Sensex price- Sensex price (closing).

Table-2 –Model summary (correlation coefficient)

Model Summary(b)

Model RR

SquareAdjusted R Square

Std. Error of the Estimate

1 .882(a) .779 .757 1518.23119a Predictors: (Constant), SENPRICE, CRUDEOIL, FIIb Dependent Variable: SENSEX

From the model summary table, we can know the following things about our

research model.

i) Here R=.882 =88.2% , which show that correlation coefficient which

is positive correlation it means in this model all the independent

variables have positive correlation collectively .

ii) R² = co-efficient of determination = explained variable/total

variable.

R² signified the strength of the model and strength of the relationship

between dependent variable and independent variables.

Here, R² = .779 =77.9%, it shows that the independent variables (crude

oil price, FII, index closing) are explained the model or dependent variable

77.9%, means all the independent variable have impact on the dependent

variable up to 77.9% .

And rest of 22.1% is not explained by our dependent variables. Hence

22.1% and the other factor which influence the stock market.

12

iii) here the adjusted R square = 75.7% which means the 75.7%

explained by the independent variable with perfect, where no error

means the real strength of the model.

Table-3(ANOVA)

ANOVA(b)

Model Sum of

Squares df Mean Square F Sig.1 Regression 251237908.

2733 83745969.424 36.332 .000(a)

Residual 71455804.075

31 2305025.938

Total 322693712.347

34

a Predictors: (Constant), SENPRICE, CRUDEOIL, FIIb Dependent Variable: SENSEX

If we look to the ANOVA table means analysis of variance the ANOVA table

signifies the statistical validity of the model.

In this table F value(calculated value) = 36.332.

The degree of freedom for variables = (n-1)=(4-1)=3

The degree of freedom for observation (sample)=n-1 =35-1=34

Now if we refer the F table with degree of freedom=3 and degree of

freedom of observation = 34 with pre-determinant level of significant

=0.01% =99% level of confident.

T.V=4.31 & C.V=36.332

Hence, C.V> T.V

=>36.332>4.31.

Since, C.V>T.V

Null hypothesis =Ho=µ is rejected

13

Accept the alternative hypothesis =H1

Hence, all the independent variables have impact on the stock market

-:Regression Model Analysis :-

Model= a+bı(crude oil)+b2(FII)+b3(index)+ε.

where,b1, b2,b3 ……..and the regression co-efficient between DV and IV.

So, model is

Sensex=1822.162+48.69(crude oil)+.029(FII)+.609(INDEX)

Now, if we move to T column T value for 99% of pre-determinant level of

confident

T.V= T-value=2.423

Now we have to take these T.V will have higher impact on the D.V.

Hence, Sensex= f(crude oil, index).

Hence, crude oil price and BSE – index closing. Are statistically insufficient

Here, index closing price explain Maximum Variation in the D.V Sensex =

61.9% and followed by crude oil price= 39.4%

Conclusion

Correlations

SENSEX CRUDEOIL FII SENPRICESENSEX Pearson Correlation 1 .659(**) .350(*) .812(**) Sig. (2-tailed) . .000 .034 .000 N 37 37 37 35CRUDEOIL Pearson Correlation .659(**) 1 -.062 .402(*) Sig. (2-tailed) .000 . .716 .017 N 37 37 37 35FII Pearson Correlation .350(*) -.062 1 .509(**) Sig. (2-tailed) .034 .716 . .002 N 37 37 37 35SENPRICE Pearson Correlation .812(**) .402(*) .509(**) 1 Sig. (2-tailed) .000 .017 .002 . N 35 35 35 35

14

** Correlation is significant at the 0.01 level (2-tailed).* Correlation is significant at the 0.05 level (2-tailed).

In the correlation table correlation between sensex D.V with I.V crude

oil price, FII, and index closing are .659, .350 and .812 respectively at

the 0.01 level of significant. This shows the positive correlation among

the variables.

Hence, we can conclude that here is positive relation between the

movement of crude oil price on the stock market.

So crude oil price impact the sensex.

References

http://www.bseindia.com/histdata/hindices.asp

http://tonto.eia.doe.gov/dnav/pet/hist/wtotworldw.htm

www.rbi.org.in

15