Impact of Oil Prices on the Stock Market, When Gas Zooms, Stocks Reach the Abyss

Anyone who has cared to study the market for the last ten years or so would be able to see that the impact of oil price is inversely proportional to the stock market indices.

In other words, whenever the oil price shoots up, the stock market consistently goes down. And the opposite is equally true. When prices go down, it is time for the stock market to rise. At least that’s what has happened for the last several years or so. But does this mean that the impact of oil prices on the market is a predominant factor for all commercial transactions in a country? The answer could be both “yes” and “no”.

Let us start with the yes part first. Movement in oil prices undoubtedly creates uncertainty in the stock market for the simple reason that, the former upsets the entire market trend that includes all types of transportation, manufacturing processes and it also often halts industrial growth to some extent. And this in turn, affects the life of a nation in an adverse way.

How Does the Oil Price Affect the Stock Market?

Price of oil affects the price of stocks in several ways.

When the oil price goes up, it usually leads to inflation. For the business, this means increased expenses to procure goods that go into the production process. Increased transportation costs as the goods are shipped. Increased marketing costs because the distributor expenses are also up. And even the advertisers might be charging more. So the entire economy becomes more expensive.

Inflation because of oil price hike is a problem for the sales team too. Consumers have less money in hand because they have to spend more on essential items. Because of this the demand for the produced good goes down.

Thus we see when the price of oil goes up, the expenses are increased, but the incomes are reduced. This naturally is a serious problem for the business. The stock market and investors understand this, and businesses across the spectrum lose value.

The stock market may move in the opposite direction to the oil price, but it does not happen the other way round. In other words, the price of stocks has no impact on the crude price, even though a lot of oil companies are also traded in the stock market. The oil price is controlled by the OPEC countries.

Is the Entire Stock Market Affected?

However, fluctuations in crude prices need not necessarily affect the stock market in its totality. Some stocks are affected more than others always. For example, the prices of stocks of automobile companies, consumer durables, entertainment and hospitality businesses, TV manufacturers, those making electronic gadgets are always affected more than others.

Of course, it affects the financial sector too. This may include banks, investment institutes managed by government or quasi-government bodies, real estate, insurance companies and others. In course of any oil price hike, it may be prudent to hold on to energy stocks.

It does not even mean that all companies in these sectors will witness a drop in the price of their stocks. Often, if there is an inherent demand for the stock of a particular company, it will rebound quickly and may even surpass the high price from where it fell.