Impact of oil prices on the stock market

Change in oil prices does not necessarily affect the stock market as there is a direct relationship between price of oil and the stock market.

How often have you heard about the stock market and are you aware about it? Some people are completely aware of what stock market is and others don’t even know what it is all about?  Do oil prices really have an impact on financial markets?  On any given day, the stock market commentators like to draw parallels between the behavior of oil prices and stock prices.  It is a well-known fact that the change in oil prices does not necessarily affect the stock market in any predictable way.  The stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price. They are securities listed on a stock exchange as well as those only traded privately.

According to analysts, there is a direct relationship between the price of oil and the stock market. There are many factors that affect the financial markets.

Factors influencing the stock market

1.     Prices of oil and stock market work in opposite direction:   The prices of oil and stock market work in opposite direction. The increase in oil prices leads to the decrease of the return in the Indian stock market. The decrease in oil prices leads to increase in the return on stock market.

2.     Increase in oil prices increases transportation cost:  The increase in oil prices leads to increase in transportation costs as well as the heating costs for some elements which almost affects some of the manufacturing company.

3.     The effect of rising oil prices is similar: The effect of rising oil is prices is similar to the effect that an interest rate hike has on consumers. Any kind of hike on energy costs affects the economy in three ways including:

• The consumers have less money to spend on luxury or discretionary items
• There is weaker global growth
• The cost of doing business rises as transportation costs rise. This affects everything from food to clothing and minerals.

4.     Profitable to investors:  The oil price increase can be of great advantage to the investors.  If he buys one barrel of oil for 30 dollar after a few months, the price increases to 50 dollars per barrel.  This shows that if he sells he will earn a profit of 20 dollar per barrel, which will be great profit for the investor.

Relation between oil and stock markets

Positive co-relation

The price of oil can be positively correlated to financial markets which can be seen during the time period from early 2003 to late 2006. As the price of oil continued to rise, so did the S&P 500. From 2003 to 2006, it was the success of business that caused the markets to rise. Many financial analysts believe that oil does not have a positive correlation to the financial markets. The financial markets can do well when the price of oil is rising.  Commodity analysts believe that oil does not have any positive correlation to the financial markets.

Negative co-relation

The negative co-relation is the accepted relationship between the oil prices and the financial markets. When oil prices rise, many companies will have to spend more money to run their business.  This is because most companies ship products and by land, air or sea. Oil is a prime factor in the cost of shipping. The consumers feel the impact of high oil prices as they have a knock on effect on gasoline prices, which increases more often than not lead to decrease in consumer spending.

The co-relation between oil and currency market

The relationship between financial markets and oil is the role oil plays in currency market. The U.S. dollar fell against major currencies worldwide in 2008 and the price of oil increased. The reason for this relationship is the fact that a weaker dollar makes each barrel of oil more expensive. In the U.S. and overseas, the oil prices have a big impact on inflation.  As oil prices increase, the price of gasoline also increase which also creates additional fuel surcharges. These surcharges increase the core inflation as central banks will continue to keep interest rates higher under these conditions.

List of oil companies in India and abroad

Some of the oil companies abroad are as follows:

1.     Saudi Arabian Oil Co

2.     National Iranian Oil Co

3.     Qatar General Petroleum Corporation

4.     Iraq National Oil Company

5.     Abu Dhabi National Oil Company

6.     Royal Dutch/Shell.

Some of the companies in India are as follows:

1.     Gujarat State Petroleum Corporation

2.     Oil and Natural Gas Corporation

3.     Oil India

4.     Reliance Industries

5.     Oil and Gas Development Company

6.     PTT Public Company Ltd.

Thus, through this valuable information one has learnt regarding the impact of oil prices on the stock market. Always remember that it is very important to do a good market research before you invest in any oil marketing company or stock.