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 its 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.

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 y

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 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. 2

Price of Crude oil

1. Increases the demand for crude oil..

Supply P2 P1 2. ...resulting in a higher price... New equilibrium

Initial equilibrium D2 D1

3. ...and a higher quantity sold.

Q1

Q2

Quantity of Crude oil

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 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, 3

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 Brse 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 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 Brse 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 longterm 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 Management System Standard BS 7799-2-2002 certification for its BSE Online 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 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.

CHAPTER 2:- RESEARCH METHODOLOGY

 Research Statement: To study the impact of Crude oil price on Stock market Movement.

 Objective of Study:y To Study the relation between crude oil price and movement of Indian stock market. y 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 :y y Dependent variable is Sensex Independent variables and Sensex price, crude oil and FII.

 Methodology:1) Sampling: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. 8

 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:

y We cant conclude that the crude oil price is the only variable which impacts the stock market. There are many variables like inflation , FII FDI, political issues , government monetary polices etc which are also Influence the stock market. y Period for the data collection is limited for the study only for the three year data.

SENSEX INDEX CLOSING

10,000.00 15,000.00 20,000.00 25,000.00 5,000.00 0.00

sensex

10,000.00

15,000.00

20,000.00

25,000.00

5,000.00

0.00
months

OBSERVATION

comparative analyse

COMPARATIVE ANALYSIS

MONTHS

Comparative analysis between FII and SENSEX

Ap M r-0 ay 6 Ju -06 n Ju -06 Au l -06 g Se - 0 p 6 O -06 ct No -06 De v-0 c 6 Ja -06 nFe 07 b M -07 a Apr-07 M r-0 ay 7 Ju -07 n Ju -07 Au l -07 g Se - 0 p 7 O -07 c No t-07 De v-0 c 7 Ja -07 nFe 08 b M -08 ar Ap -08 M r-0 ay 8 Ju -08 n Ju -08 Au l -08 g Se - 0 p- 8 O 08 c No t-08 De v-0 c 8 Ja -08 n Fe -09 b M -09 a Apr-09 r09
0 20 40 60 80 100 120 140 160

CHAPTER 3:- DATA ANALYSIS

A M pra 0 J uy -06 n 6 J -0 A ul -0 6 ug 6 S e 0 O p- 06 c N t- 0 6 D o v- 6 e 0 J ac-0 6 F e n-06 M b- 0 7 a A r- 07 M pr- 7 a 0 J uy -07 n 7 J -0 A ul -0 7 ug 7 S e 0 O p- 07 c N t- 0 7 D o v- 7 e 0 J ac-0 7 F e n-07 M b- 0 8 a A r- 08 M pr- 8 a 0 J uy -08 n 8 J -0 A ul -0 8 ug 8 S e 0 O p- 08 c N t- 0 8 D o v- 8 e 0 J ac-0 8 F e n-08 M b- 0 9 a A r- 09 pr 9 -0 9
0.00

5000.00

-5000.00

10000.00

15000.00

20000.00

25000.00

-20000.00 FII FII

-15000.00

-10000.00

crude oil price

SENSEX

CRUDE OIL

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

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SENSEX

HYPOTHESIS TESTING
Let the null hypotheses is Ho== All the independent variable doesnt have any impact on stock market (Sensex). And Alternative hypothesis is H1== 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

Model

( )

ll requested variables entered. ependent Variable: Table-1

Variables entered /removed

In 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)

(b) djusted quare .757 td. rror of the stimate 1518.23119

Model quare 1 .882(a) .779 a Predi tors: ( onstant) P b ependent Variable:



   
b /

(b)

#$# 5

 %%2 '1%0)(!& '&%! $#

!  

  

V i

les ered

V ri les emoved

Method ter

)  4

"

11

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) R = co-efficient of determination = explained variable/total variable.

R signified the strength of the model and strength of the relationship between dependent variable and independent variables. Here, R = .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. 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)
7 698 6
Total a Predi tors: ( onstant) b ependent Variable: (b)

egression esidual

3 31 34

83745969.424 2305025.938

36.332

B@

G@HG@ T IIA FSIRGQPCE FGEIC HG@ F

C C D

Model 1

um of quares 251237908. 273 71455804.0 75 322693712. 347 P

@ @

df

Mean quare

i .

.000(a)

12

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= is rejected Accept the alternative hypothesis =H1

Hence, all the independent variables have impact on the stock market -:Regression Model Analysis :Model= a+b (crude oil)+b2(FII)+b3(index)+ . 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). 13

Here, index closing price explain Maximum Variation in the D.V Sensex = 61.9% and followed by crude oil price= 39.4%

Pearson orrelation ig. (2-tailed)

.659(**) .000 37 1 . 37 -.062 .716 37 .402(*) .017 35

.350(*)

Pearson orrelation ig. (2-tailed) Pearson orrelation ig. (2-tailed)

.000 35 ** orrelation is signifi ant at the 0.01 level (2-tailed). * orrelation is signifi ant 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.

x x

h f

gpuq hgf

Pearson orrelation ig. (2-tailed)

. 37 .659(**) .000 37 .350(*) .034 37 .812(**)

.034 37 -.062 .716 37 1 . 37 .509(**) .002 35

gpuq hgf

uuw

vutgsrqp

ed Wc ba` YXX WV

gfhgf i

Hence, crude oil price and BSE

index closing. Are statistically insufficient

Conclusion

P .812(**) .000 35 .402(*) .017 35 .509(**) .002 35 1 . 35

p p p

h f h f h f

vutgsrqp p p uuw

gfhgf i

14

References
 http://www.bseindia.com/histdata/hindices.asp
 http://tonto.eia.doe.gov/dnav/pet/hist/wtotworldw.htm

 www.rbi.org.in

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