The Relationship Between Oil Price And The Stock Market (1)

Oil is undoubtedly a core commodity across the world and it is one of the things that have held the global economy together.

Oil is undoubtedly a core commodity across the world and it is one of the things that have held the global economy together. Its need in our everyday lives – from the role it plays in transportation, machinery, power, and more – cannot be overemphasized.

In Nigeria, this need is even more dire from a macroeconomic standpoint as a majority of the country’s revenue is tied to the oil sector. Owing to the covid-19 pandemic and dwindling demand for oil both as a result of the pandemic but also as a result of new suppliers springing up, the oil sector globally has been down.

This is evident in the reduction in the price of fuel we can already witness (With excess supply over demand, price comes down so as to reach more buyers) the implication of the recent unfavourable developments in the sector.

Yet, there is more to it and one of such is the implication of oil on the stock market or the equities market. While many have argued as to whether a correlation does exist or not, there are core ways to see the close relationship between what happens in the oil sector and how it affects the stocks you invest in.

It is pertinent to note here that the relationship is not to create a system for correctly predicting stock market movements (for example, oil crashing does not generally mean the stock market index will be stronger) but to provide insights on the relationship between oil as a market variable.

Because oil is a key commodity in use by businesses worldwide, it is natural that its increased cost or decreased cost affect companies in terms of transportation, power, and available disposable income – all of which could impact stock prices.

The idea is that the economy might just be too complex to be directly impacted by just one commodity. In other words, the correlation could just be theoretical and solely based on the general idea that crude is so important to the global economy as a result of its impact on liquidity (available cash in a business) and its earnings or profitability after oil-related costs like power have been removed.

However, critics of this assumption are also clear to point out that there are other key factors in the economy that could contribute to such changes in price or expenditure. One of such are interest rates. In essence, the relationship could only be marginal.

While this is an overall rundown of the relationship between oil and the stock market, in our next post, we will highlight some of the key areas in which oil could potentially affect your stock investments and how you can leverage it to meet your investment objectives.

Written by Lawretta Egba.