Why is the oil price important to the stock market?

Modern industry relies heavily on transportation to deliver raw materials to factories and to deliver finished products to customers. The price of oil (as used in transportation) affects the end price of virtually every physical product that has to be moved from point A to point B. In many cases, this includes transportation across oceans. Chemical and pharmaceutical industries are also heavily dependent on petrochemicals to supply hydrocarbon feedstock into their manufacturing processes. The generation of electricity is heavily dependent on oil as fuel for the diesel engines that drive the generators in many parts of the world. Virtually every part of economic activity is affected by the price of oil in some way.

Oil Price Dynamics

BTW, note that high oil prices are good for the oil companies and bad for the remainder of the economy, and vice versa for low oil prices, so the effect of price changes has a somewhat self-correcting mechanism from the point of view of the total economy. However, I would argue that the benefits of low oil prices to the rest of the economy have a greater positive effect than the negative effect on the economy that results from the poor performance of oil companies and oil-producing countries. It is one of the many factors that impact the market. However, the relation is not direct and the impact is not widespread.

The companies that are affected are oil exploration and production companies, oil marketing companies, and a few other industries that use petrochemicals as raw materials. Small changes in the prices seldom cause significant effects. Only a drastic fall in crude oil prices affects the market as a whole. Oil, being an important commodity and as valuable as the combined value of all the world’s stock markets, affects the market more psychologically than monetarily. So, nothing much to worry about the price swings. In the long term, everything is stabilized.

By ukpia