Crude oil's effect on the stock market can be logical but it may also be inspired by emotion. Investors sometimes buy and sell equity securities based on feelings of foreboding or exuberance. Nonetheless, the price of crude oil can have a direct impact on equities. Higher prices for the commodity could generate profits for some companies but may stall income elsewhere.
Crude oil can have different effects on the stock market. Sometimes, it depends on other economic conditions to determine the precise impact that the commodity is having on equities. Generally, dramatically high crude oil prices are damaging to individual industries that list shares in the markets. When consumers are forced to pay more for energy, they may spend less in other areas, which can hurt corporate profits. There are some exceptions, however.
When the price for crude oil is rising, the upward momentum often benefits the companies that drill for the natural resource. These service companies earn greater profits when the price of oil per barrel increases, especially if the cost to drill for the commodity remains steady. Conversely, investors might sell oil stocks when crude prices decline. In 2011, when the commodity was exhibiting some weakness, major energy stocks lost significant market value as the proposition for drilling oil became less compelling, according to "Forbes."
When there is uncertainty in the economy that originates from political instability in major oil-producing nations, the impact could reverberate throughout the stock market. In 2011, when unrest in Libya, which is host to vast oil resources, reached a boiling point, the threat of interrupted energy supplies to the rest of the world became greater. Those fears triggered a spike in the price of oil and nervous investors exited the stock market, according to "USA Today."
The supply and demand of crude oil is not the only factor that moves stocks. In some cases, both oil and the stock market respond to something even more influential - the economy. On October 10, 2011, the price for Brent crude, which is a type of oil that is commonly traded, jumped nearly 2 percent. The spike was in response to indications that the economy was staving off a recession, according to "The Wall Street Journal."
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