How Does The Price Of Oil Affect The Stock Market?
Stephen Romero - July 22, 2020
Ever since the price of crude oil started growing there has been talk about the price of oil affecting the share market and your investments. Now if you think about it logically it does sound like it would make an affect. If it costs a company more to run the company because oil prices are changing then it sounds like it would affect the share price. Same goes for the idea that people will be less or more likely top purchase shares in a company that has something to do with oil. So for instance would you invest in a company which sold hose sockets if you were in a draught? However is this theory about crude oil price affecting the share market actually real?
The rational behind this theory is that because many companies freight their products, they have to pay more to transport the products when price of oil goes up so does the transportation cost. This of course drives up the price of the product. So if the company wants to keep the price of their product at the same level, there will be less corporate profit and the share prices will go down after that. Makes sense right? Well maybe not!
Companies do tend to put up the price of their product or service if the price of providing it goes up. So the profit margin will stay at approximately the same. However if the mood of the population, and in particular the stock market investor population, changes about the product the industry might suffer.
Yes global events that affect the price of products like oil (think about Hurricane Katrina) do affect the investment mood. When there is a massive climb or dip people and investment companies tend not to change their portfolio around too much. But however when something grows in price over time people is less likely to react. We all know that the price of oil is growing but it is not like when a major event happens.
Straight after an event occurs fear spreads like wildfire. One person’s fear turns into the fear of an entire investment industry. So no one buys or trades, but there are generally lots of people selling. So there is no actual understanding of what is going on. Once the environment calms down so does the market.
So yes in massive bombs the price of oil will affect the price of shares. But in a long term growth situation it won’t matter. The price of oil has almost quadrupled over the last five years. But has the price of shares?
Not really because oil has become an even more precious commodity people want it even more. And owning shares in an oil company will give you that piece of Texas gold that you have been craving. So the price of oil shares hasn’t really changed, and if it has it has grown.
So if we know that market changes will affect the share price because of the mood of people buying and selling shares we can predict the change. If you feel a change in mood, it is almost certain that there will be change in market. So you can sell, but there also is a chance that the price will raise again after too long.
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