The daily fluctuations of the stock market affect many other aspects of the economy, including the price of crude oil. However, in some cases, the price of crude oil may also affect the behavior of the stock market. The relationship between crude oil prices and the stock market is complicated, and the exact effects they have on one another often depends on outside circumstances.
About Stock Market Behavior
Stock prices rise and fall daily. High stock prices indicate a strong economy, while low stock prices indicate that the economy is weak. Stock prices sometimes fall because investors aren't comfortable investing in stock and are focusing their efforts on other securities, which may occur when the economy is volatile. When the economy shows improvement again, investors will resume trading of stocks and the stock market will rise.
About Crude Oil Prices
Supply and demand are the primary drivers for crude oil prices. When demand for oil is high, the price increases. When the demand is low, however, the price decreases. Likewise, when there is an overabundant supply of oil in comparison to the demand, the price for oil will decrease. Finally, a limited supply of crude oil in comparison to the demand will raise the price of oil.
Stock Market's Effect on Crude Oil
Because a high stock market indicates a strong economy, oil companies typically predict that the demand for oil will be high as well. Since the demand for oil drives its price, the price will increase. When the stock market falls, however, the economy is usually weak. In this situation, oil companies predict that the demand for oil will decrease, so they lower the price in response.
Oil's Effect on the Stock Market
When oil prices are extremely high, people tend to drive less and spend less money on consumer purchases, which may indirectly lower the stock market. Threats of increased prices may also cause investors to worry about the state of the economy, which can lower the stock market as well. On the other hand, a dramatic drop in oil prices can stimulate the economy, which in turn raises the stock market.
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