Oil, Elections and Equities: A Blip or Structurally Better 2027?

Global financial markets are confronting an interesting paradox. Crude oil prices have been falling sharply, the US midterm elections have delivered a significant political reversal, and investors are beginning to anticipate an easing of geopolitical tensions. Yet, interest rates remain elevated and economic growth is uneven.

The question, therefore, is whether this combination of lower energy prices and more reasonable valuations is creating the conditions for a sustained equity rally, or whether markets are underestimating the risks to those earnings expectations.

Crude as Starting Point

Brent, which had touched approximately $131/bbl during September and was trading above $100/bbl just days ago, has retreated to around $92/bbl at the time of writing. WTI, the principal US benchmark, is trading around $86/bbl.

The Democrats' resurgence in the US midterm elections has introduced another dimension to the oil market. A changed political balance in Washington could increase pressure on the Trump administration to de-escalate its confrontation with Iran. Trump's subsequent suggestion that further military action may be unnecessary if negotiations progress has reinforced expectations of a possible diplomatic resolution.

But markets can price in the prospect of peace long before its consequences become visible in the physical oil market.

The Strait of Hormuz remains vulnerable, shipping disruptions have not disappeared, and the underlying physical market remains constrained. US Strategic Petroleum Reserves stood at approximately 282 million barrels at the end of October, while commercial inventories have been under pressure. OPEC+ has maintained its December production quotas rather than announcing a substantial supply increase.

There is, therefore, an important distinction between a reduction in the geopolitical risk premium and an actual restoration of oil supply. The former can happen almost overnight; the latter could take considerably longer.

What makes the situation particularly interesting is what the oil market is telling us about the next year.

Brent crude futures remain in backwardation, with near-term contracts trading above those for later delivery. The November and December 2027 contracts are trading at $78/bbl, respectively. While futures prices should not be interpreted as precise forecasts of future spot prices, the curve reflects a market that places a premium on immediately available crude relative to future deliveries.

This is also corroborated by the US Energy Information Administration, which is projecting a recovery in global oil production and exports from the Middle East during 2027, with a Brent spot price forecast of $77/bbl in Q4 2027.

That raises an important possibility. If disrupted Middle Eastern production returns while supply elsewhere continues to expand, the market could move from an acute geopolitical shortage towards a considerably more comfortable supply-demand balance.

There is also a longer-term structural change underway on the demand side.

According to the International Energy Agency, global electric vehicle sales exceeded 20 million in 2025, representing nearly 25% of new car sales, with that proportion expected to rise to 40% by 2030. EVs already displace approximately 1.7 million barrels of oil consumption daily, a figure that could approach 5 million barrels by 2030.

This will not eliminate petroleum demand, particularly across aviation, shipping, petrochemicals and heavy transport. Nor will EV adoption determine crude prices over the next few months. But it does suggest that the historical relationship between economic growth and incremental oil consumption is gradually weakening.

For oil producers, the challenge is no longer simply how much the world needs today, but how much additional demand will materialise over the lifetime of new production investments.

Cheap Oil Only Part of the Equation for Equities

The Federal Reserve continues to hold its policy rate at 3.75–4%, while US Treasury yields remain elevated. The IMF's October forecasts anticipate global economic growth improving from 3.1% in 2026 to 3.4% in 2027.

These are reasonably encouraging growth projections, and the recent correction has also made equity valuations more attractive. According to FactSet, the S&P 500 was trading at 17.7x forward earnings on 5th November, below its five-year average of 19.8x and ten-year average of 19.1x. However, much of this valuation compression has been driven by rising earnings expectations rather than falling share prices. The question, therefore, is whether those earnings expectations can withstand an environment of elevated interest rates and uneven global growth.

Ultimately, equity prices reflect expectations of future earnings, the cost of capital and the multiples investors are prepared to pay for those earnings. Lower oil prices can influence all three, but not necessarily in the same direction.

If crude declines because supply recovers while economic growth remains resilient, the combination of lower inflation, improving corporate margins and greater monetary flexibility could provide a powerful foundation for equities. Conversely, if oil falls because global demand is deteriorating, weaker corporate earnings could overwhelm any benefit from lower interest rates.

There is a further complication. Markets discount expectations rather than simply react to outcomes. Even if Brent moves towards $75–80/bbl, the upside for equities could be limited if investors have already priced in lower inflation, monetary easing and an earnings recovery.

The more relevant question, therefore, is whether economic conditions improve faster than current valuations imply.

Significant Implications for India

Unlike the US, which is both a major oil producer and consumer, India remains heavily dependent on imported crude. A sustained decline in oil prices could improve our current account, moderate inflationary pressures, support the rupee and benefit sectors such as aviation, logistics, chemicals, paints, automobiles and consumer goods.

The second-order effects could be equally important. Lower energy costs can improve household purchasing power and corporate profitability simultaneously, potentially supporting a broader recovery in consumption and earnings.

However, India's domestic advantages do not guarantee superior equity-market performance.

Elevated US bond yields, a stronger dollar or a sharp correction in American and other global equity markets could still trigger capital outflows and valuation compression, even as India's economic fundamentals improve.

There are domestic risks too. Sustained headline inflation around 5.5–6%, particularly if aggravated by El Niño-related disruptions to agricultural output, could constrain monetary policy and rural consumption. A moderate rate hike, should inflationary pressures persist, would further complicate the earnings recovery.

This is why I would distinguish between being constructive on India's medium-term economic prospects and being indiscriminately bullish on Indian equities at prevailing valuations.

Is the Next Equity Rally Already Here?

I would argue that the conditions for a more constructive 2027 are beginning to emerge, but the evidence is not yet conclusive.

Three developments would strengthen that conviction: a sustained restoration of physical oil supplies, an easing of inflation without a corresponding deterioration in global growth, and corporate earnings expectations that remain resilient enough to justify equity valuations.

The risk, of course, is that markets begin celebrating the first development while taking the other two for granted.

Ultimately, the direction of oil prices matters less than the reason they are moving. A world of cheaper energy, moderating interest rates and resilient corporate earnings would be a favourable environment for equities, particularly in energy-importing economies such as India. A world of cheaper oil because consumers and businesses are spending less would tell an entirely different story.

The next sustained equity rally will not be driven simply by falling crude prices. It will depend on whether the global economy can afford cheaper oil without sacrificing growth, and whether investors have already paid too much for that possibility.