ภาษาไทย
Tiếng Việt
Oil price changes can impact economic growth, corporate earnings, global trade, and inflation, directly impacting the stock market. As a result, they can also impact an individual’s stock market portfolio.
Let’s look at how oil prices affect the stock market in different ways.
Energy sector performance
The energy sector is directly linked to oil prices, encompassing companies involved in the exploration, production, refining, and distribution of oil and gas products. When oil prices rise, energy companies can experience increased revenues and gains, leading to higher stock prices. The gains of upstream companies (involved in finding and extracting crude oil and natural gas) in exploration and production activities are directly tied to oil prices.
Conversely, falling oil prices can weigh down energy stocks as revenues decline, impacting the gains of both upstream and downstream (engaged in refining, processing, and distributing oil and gas products to consumers) companies. Moreover, oilfield services companies may experience reduced demand for their services during periods of low oil prices.
Corporate gains and margins
Companies that rely heavily on oil as fuel for transportation often face increased production costs when oil prices rise, leading to compressed gain margins. Industries such as transportation, manufacturing, and chemicals are sensitive to oil price changes due to their operational dependence on oil-based products. Lower oil prices can boost gains for these companies, providing a tailwind for corporate earnings and margins.
Consumer spending and confidence
When oil prices rise, consumers face higher costs for gasoline and other energy-related products, reducing discretionary income and dampening consumer spending. This can be applied to lower-income households, as they allocate a larger portion of their budget to energy expenses. Hence, their investments decrease, further dampening company stock prices due to a lack of investor demand.
On the other hand, lower oil prices can act as a stimulus for consumer spending. As customers witness a reduced cost of transportation and heating, it boosts disposable income and shifts consumer spending towards stock investments, further appreciating the stock prices.
Inflation expectations
Oil prices and inflation are positively related. Higher oil prices can lead to higher inflation expectations, increasing costs throughout the production and distribution chain. It can prompt central banks to tighten monetary policy to curb inflationary pressures, decreasing stock prices due to increased borrowing costs for investors.
In contrast, lower oil prices can alleviate inflationary concerns, giving central banks more room for accommodative monetary policies. It can stimulate economic growth, thereby increasing stock market prices.
Exchange rates and international trade
Higher oil prices benefit net oil-exporting countries by improving trade balances, strengthening currencies, and potentially boosting stock markets. Conversely, countries that are net oil importers may experience currency depreciation and trade deficits when oil prices rise, decreasing stock market prices.
Change in investor sentiment
Sharp increases in oil prices signal potential inflationary pressures, supply disruptions, or geopolitical risks, leading to heightened market volatility and risk aversion. It can negatively impact investor confidence and lead to capital flight from riskier assets, decreasing stock market prices.
Declining oil prices may boost investor sentiment, particularly for industries sensitive to energy costs, as they see improved gains prospects and reduced inflationary pressures, increasing their stock market prices.
Sectoral allocation of capital
Changes in oil prices can influence the allocation of capital across different sectors of the economy, both negatively and positively. Higher oil prices may attract investment in the energy sector as investors seek to capitalize on increased revenues and gains, increasing its stock market prices.
In contrast, lower oil prices may divert capital towards industries that gain from reduced input costs, such as transportation, manufacturing, and consumer discretionary sectors, decreasing stock market prices for the company investor deviates from.
Government revenues and fiscal policy
In countries where oil plays a significant role in the economy, fluctuations in oil prices directly influence government budgets and fiscal policies. This stimulates economic growth, boosts investor confidence, and further appreciates the country’s overall stock market.
Lower oil prices can strain government finances, leading to austerity, reduced public investment, or higher taxes. This dampens investor sentiment and negatively impacts stock market returns, especially in sectors reliant on government spending.
Environmental and climate considerations
Environmental and climate considerations related to oil prices can shape investor preferences in the stock market. Heightened climate awareness can influence investors to favor companies with strong environmental practices and renewable energy initiatives, boosting their stock prices. Higher oil prices may accelerate this trend by incentivizing investment in clean energy alternatives and sustainable technologies, potentially driving stock prices higher for companies in these sectors.
However, lower oil prices may diminish investor interest in renewables and sustainable investments, particularly if they perceive reduced urgency in transitioning away from fossil fuels. This dynamic can influence sectoral valuations and investor allocations within the stock market, reflecting evolving attitudes towards environmental sustainability and climate resilience. Furthermore, a shift from such companies decreases their stock market prices.
Trading the stock market with oil price fluctuations
Traders should closely monitor oil price fluctuations as they can signal changes in production costs, inflation expectations, and geopolitical risks, impacting stock market performance. Higher oil prices often lead to a gain in energy sector stocks but may dampen overall market sentiment due to inflation concerns. Conversely, lower oil prices can stimulate consumer spending and boost non-energy sectors. Traders must note the changing oil prices to make informed trading decisions.
Disclaimer: All material published on our website is intended for informational purposes only and should not be considered personal advice or recommendation. As margin FX/CFDs are highly leveraged products, your gains and losses are magnified, and you could lose substantially more than your initial deposit. Investing in margin FX/CFDs does not give you any entitlements or rights to the underlying assets (e.g. the right to receive dividend payments). CFDs carry a high risk of investment loss.
About The Author
