How Does the Stock Market Affect Oil Prices?

by Lee Nichols, studioD

Stock market gains and losses often indicate the status of the economy of the United States. Economists often disagree about the effect of the stock market on oil prices, or even if the market has any affect on oil prices at all. A 2009 study by the Federal Reserve Bank of Cleveland compared market gains to oil prices over 10 years and found no significant correlation between the two.

Bull Markets

Economists refer to rising stock markets as bull markets. When the market is rising, economists theorize that the economy is increasing and companies will ramp up production to meet consumer demand. Increased production leads to increased shipping to transport the products. An increase in transportation can result in a higher demand for oil to turn into fuel. As oil prices fluctuate due to demand, an increase in the demand for oil tends to increase its price.

Bear Markets

Continuously falling, or bear, markets indicate pessimism for the status of the economy. Bear markets signify a slow down in the economy and a decrease in the demand for oil as production and transportation decrease. Just as a bull market can cause demand to increase, a bear market can decrease demand, causing oil prices to drop as a result.

Long Term Data

While it is natural to assume that oil prices rise and fall based on the stock market, long term data does not bear this to be necessarily true. Occasionally oil prices move in the same direction as market trends, but often the two move independently of each other with oil prices falling when the market rises, and vice versa. Regardless of whether the comparison encompasses years or looks at the data by the week or month, there is little correlation between market rises and falls and oil prices.

Other Factors

Even if the stock market does not have a direct affect on oil prices, other factors absolutely do. These factors include speculators, who can drive the cost of oil up by creating backwardation markets by increasing the price of oil futures, the differences in crude oil obtained when retrieving oil and government laws. Sweet crude, or crude with a low-sulfur content, costs less to refine. If production limits the amount of sweet crude available, the price of oil goes up. In 2010, a U.S. law placed more power in the hands of the U.S. Commodities Futures Trading Commission allowing it to regulate oil futures. This law can decrease the volatility of the market by decreasing the influence of speculators.

About the Author

Specializing in business and finance, Lee Nichols began writing in 2002. Nichols holds a Bachelor of Arts in Web and Graphic Design and a Bachelor of Science in Business Administration from the University of Mississippi.

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