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What is the Relationship Between Oil Prices and the Stock Market?

In many ways, the financial market remains susceptible to the macroeconomic climate. The value and performance of derivatives can be affected by a number of alternative factors, from rising inflation and interest rates to consumer sentiment.

In some instances, however, the performance of individual asset classes and markets can be influenced by others. Take the stock market, for example, which is directly impacted by oil prices and their movement over the course of each daily trading period.

3 Ways in Which Oil Prices Impact on the Stock Market

While there is no clearly defined or indisputable rule for this, a review of daily forex news and a quick glance at the chart below suggests that there is a general correlation between oil prices an the performance of the stock market. To understand this further, and explore the precise ways in which oil prices influence the stock market, lets consider the following: 

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1.The Energy Market is Sensitive to Oil Prices and Influences Other Stocks

Oil and gas stocks are particularly influential and lucrative entities, while they also remain extremely sensitive to wild and volatile movements in relation to the price of oil. While this stands to reason, the influential nature of the energy sector means that it also blazes a trail for others to follow, causing prices to rise and fall dependent on the prevailing price of oil.

The chart supports this assertion, as 2014 saw dramatic declines in both the price of oil and the performance of global stocks. This depreciation was triggered by the collapse of oil prices due to over supply within the market, and the impact was felt far outside of traditional energy stocks.

2.Demand for Goods Can Fluctuate in Line With Oil Prices

 On a similar note, we also need to understand that oil impacts on a number of individual consumer expenses. In instances where the price of oil increases, for example, the cost of fuel rises and makes it more expensive for citizens to travel on a daily basis. This can also have a direct impact on the average customer’s disposable income levels, causing the demand for everyday consumer goods to fall.

When this happens, business demand and confidence begins to dwindle against the backdrop of lower consumer spending.

This can have a direct and negative impact on share prices over time, as company earnings and projections must be revised to account for falling demand for goods (or, in some instances, services).

3.Increased Profits for Oil Companies and Stock Market Growth

 The spot price of oil is a function of supply, demand and investment vehicles, but when value is high companies tend to lock in supply contracts at a fixed price for a predetermined period of time.

This means that even as production and drilling costs fall, there is no need to revise the sales price and share savings with others.

This drives tremendous profitability among oil companies, which in turn drives share prices higher and create a higher level of sentiment among stock market traders. Remember, oil companies are a key and influential component of indices, so this will have a largely positive impact on stocks across variable markets.

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