Why Crude Oil is the Mother of the Market
Explore how crude oil drives both the Indian and Global commodity landscapes.
Indian Commodity Market
1. Backbone of MCX
Crude oil is the most actively traded commodity on the Multi Commodity Exchange (MCX) in India, making it a cornerstone of the Indian commodity market. Its high volatility and liquidity attract a broad range of market participants including day traders, institutional investors, and hedgers. The large number of trades it commands daily often surpasses that of other commodities combined, such as natural gas, gold, or silver. The margin requirements and tick value are also highly favorable, giving retail traders a powerful instrument to speculate. Additionally, the MCX offers mini crude oil contracts, allowing even small-cap investors to participate. This accessibility adds to its dominance in trading volumes. The performance of crude oil also has a spillover effect on other sectors and trading patterns. For many, crude oil is not just a trading opportunity — it's a primary indicator of market mood and economic energy costs, giving it a status as the “mother commodity” in India’s trading ecosystem.
2. Price Sensitivity
India imports nearly 85% of its crude oil, making the economy highly sensitive to international oil prices. Any upward movement in global crude prices significantly increases the import bill, impacting the trade deficit. This in turn contributes to inflation as fuel prices rise, affecting transportation and the cost of essential goods. For Indian policymakers, crude oil acts as a pressure point. Changes in prices directly impact the Consumer Price Index (CPI) and Wholesale Price Index (WPI). Even small fluctuations can influence the Reserve Bank of India’s monetary policy. Therefore, traders, economists, and even politicians constantly monitor oil trends. Because of this strong economic linkage, crude oil is not just a tradable asset in India but a national economic indicator. It's no exaggeration to say that its price determines the pulse of the Indian economy — making it one of the most critical commodities in the domestic landscape.
3. Currency Impact
Crude oil has a direct relationship with the value of the Indian Rupee (INR). Since India imports the majority of its oil in USD, any increase in crude prices requires more rupees to buy the same quantity. This increases demand for U.S. dollars in the forex market, leading to INR depreciation. A weaker rupee makes imports even more expensive, creating a vicious cycle of inflation and currency pressure. This dynamic makes crude oil prices a key factor in currency forecasting. Forex traders closely monitor oil trends to anticipate INR movements. The Reserve Bank of India often intervenes in the forex market during high oil price periods to stabilize the currency. This interdependence between oil and currency adds another layer of complexity for Indian economists and traders. Thus, crude oil doesn’t just influence commodities — it is deeply embedded in the macroeconomic and currency landscape of India.
4. Sectoral Influence
Crude oil affects almost every major sector of the Indian economy — from transportation and manufacturing to agriculture and aviation. When oil prices rise, logistics costs increase, squeezing profit margins for companies that rely on fuel-intensive operations. In agriculture, higher diesel costs raise irrigation and transportation expenses, pushing up food prices. Airlines and shipping companies see operational costs rise rapidly, often forcing them to pass those increases on to consumers. Even urban services like taxi fares and food delivery are influenced by oil prices. Moreover, companies using oil as a raw material, such as plastics and petrochemicals, face increased production costs. This sector-wide impact makes crude oil a key driver of inflation and stock market performance. Investors often adjust portfolios based on oil price trends, favoring or avoiding certain industries. Hence, the ripple effects of oil are far-reaching and systemic, reinforcing its title as the “mother of all commodities.”
5. Government Policy Driver
Crude oil is central to many of India’s fiscal and energy-related policies. The government spends a significant portion of its budget on fuel subsidies to keep domestic prices affordable. These subsidies fluctuate based on international crude prices, influencing public finances and the fiscal deficit. Additionally, oil price movements influence taxation — both central and state governments adjust excise and VAT on petrol and diesel to balance revenue with affordability. Crude oil also determines retail price adjustments for LPG and kerosene, which directly affect household budgets and electoral outcomes. During elections, stable oil prices become a political tool, and high prices can spark public discontent. Policymakers, therefore, monitor crude prices with heightened sensitivity. This makes crude not just an economic input, but a political and social influencer. From subsidy planning to pricing policy, crude oil sits at the heart of government decision-making in India, underscoring its dominance in national affairs.
Global & Forex Market
1. Global Reserve Currency Effect
Crude oil is globally priced and traded in U.S. dollars (USD), making it fundamentally tied to the value of the world’s most powerful reserve currency. This linkage means that when oil prices rise or fall sharply, the USD often reacts in tandem due to supply-demand imbalances and geopolitical implications. Many central banks, especially in oil-importing or exporting nations, track this relationship closely. When oil prices surge, countries need more USD to purchase oil, thereby increasing USD demand and pushing its value higher. Conversely, falling prices reduce USD demand globally. The petrodollar system, where oil-producing nations like Saudi Arabia reinvest surplus dollars into U.S. Treasury markets, further embeds oil’s role in global currency flows. Thus, oil becomes a key mover not only of energy markets but also of foreign exchange markets, especially influencing pairs like USD/CAD, USD/NOK, and even emerging market currencies. It directly impacts global monetary policy decisions and cross-border capital flows.
2. Oil Supply & Demand and Currency Volatility
Crude oil plays a crucial role in the global economy’s supply and demand structure, directly impacting the value of many national currencies. Countries that are major oil exporters—like Russia, Canada, Norway, and Saudi Arabia—benefit when oil prices rise, leading to currency appreciation due to higher trade surpluses. Conversely, oil-importing nations, such as Japan or India, may experience a weakening currency when oil prices spike. Forex traders often use oil prices as a proxy for currency prediction, especially in commodity-linked currencies such as CAD (Canadian Dollar) and NOK (Norwegian Krone). A fall in crude oil prices can reduce export revenues for oil-rich countries, shrinking their GDP and impacting central bank policy decisions. These price movements drive significant volatility in global FX markets, making crude oil an indirect influencer of currency pairs even for nations that don’t produce oil. Its universal trade significance gives it a commanding position in global currency valuation.
3. Geopolitical Risk Indicator
Crude oil is highly sensitive to geopolitical events such as wars, sanctions, OPEC+ decisions, and supply disruptions. Tensions in oil-rich regions like the Middle East or Russia-Ukraine conflict zones can spike oil prices rapidly, creating shockwaves in the forex market. Currency pairs of countries involved in or affected by these events become highly volatile. For example, during sanctions on Russia, the Russian Ruble (RUB) plummeted while oil prices surged, causing volatility in major pairs including EUR/USD and USD/JPY. Traders treat crude oil as a barometer for geopolitical tension. Safe-haven currencies like the USD and CHF (Swiss Franc) often gain strength during oil-driven crises, while emerging market currencies may weaken. Thus, crude oil serves as a geopolitical indicator within forex analysis. Understanding its movement helps traders anticipate global capital flows, hedge risks, and make informed decisions in turbulent political environments.
4. Inflation and Interest Rate Forecasting
Rising crude oil prices contribute significantly to global inflation, making it a critical factor in central banks’ interest rate decisions. Higher oil costs increase production and transportation expenses, which are eventually passed to consumers. This leads to headline inflation and can trigger tighter monetary policy from central banks like the U.S. Federal Reserve, ECB, or Bank of England. Forex markets respond to these policy shifts quickly. A hawkish stance due to oil-driven inflation can lead to currency appreciation, especially in the U.S. Dollar (USD). Conversely, falling oil prices may prompt dovish policies and interest rate cuts. Hence, crude oil prices influence forex trading through their effect on inflation expectations and central bank policies. Traders often correlate oil movement with future rate hikes or cuts, adjusting currency positions accordingly. This relationship places crude oil at the center of macroeconomic forecasting in the forex world.
5. Correlation with Major Currency Pairs
Crude oil exhibits strong correlations with specific currency pairs, making it a strategic tool for technical and fundamental traders. The Canadian Dollar (CAD), for example, is closely tied to oil due to Canada’s role as a major exporter. The USD/CAD pair tends to move inversely with oil prices — when oil rises, CAD strengthens, pushing USD/CAD down. Similarly, Norway’s Krone (NOK) and Russia’s Ruble (RUB) are linked with Brent crude. These relationships are tracked using correlation coefficients, which help traders build hedging strategies or complementary trades. Even for non-oil-exporting countries, fluctuations in oil can affect currency value indirectly via inflation or trade balance shifts. Understanding these correlations allows forex traders to diversify portfolios, predict breakouts, or confirm trends. This adds another reason why crude oil earns its name as the “mother” — because its influence spills over to multiple markets beyond just commodities.