Understanding the Impact of Oil Prices on Stocks

In my previous article US 10-Year Bonds and its effects on our stock market. Now I want to talk about oil prices. untouchable Even if you say that I always buy 50 liras, the job is a little different than you think.

If you allow me to confuse you a little bit with the academic side of things, you can be sure that I will simplify and summarize the situation later on.

I'm going to make you love charts, they tell you so much even if I don't talk. In the chart below, I have put together a chart of crude oil (blue chart), BIST100 (green chart), NDX Nasdaq (yellow chart) and S&P 500 (purple chart).

The same thing caught your attention, didn't it? From 1984 to the present day, oil prices have been moving in parallel with the indexes, but around July 2014, oil prices fell sharply while other indexes continued to rise. One of the points that we need to examine is that the graphical behavior of that decline and its aftermath exhibits similar movements again.

By the way, I would like to underline something very important again. When we put the charts on top of each other, we have a trend course that is very similar to the American stock market, don't we, BIST100? Let's note this information in a good part of our minds for now. I will come back later.

Let us recall this sudden drop in 2014.

The increase in oil production in the United States of America (USA) from 5 million barrels per day in 2007 to 10 million barrels per day in 2014, and the oversupply in the oil market as a result of the failure of OPEC members led by Saudi Arabia not to cut their production, have pushed crude oil prices down from $115 per barrel in June 2014 to below $30 per barrel today (referring to 2016).

By its very nature, the above decline upset all the markets and pulled down the indexes as well as itself. People fled to the safe haven of gold.

While this is the case during downturns, rising oil prices affect productivity by increasing production costs where oil is used as an input. Higher oil prices lead to a transfer of assets from oil importing countries to oil exporting countries, thus distorting the balance of trade of the purchasing countries. Of course, rising prices lead to an increase in the demand for money. In cases where the demand for money cannot be met, the interest rate will increase and the ability to act will decrease. Higher oil prices will cause inflation and will also have a negative impact on consumption, investment and stock markets. Economic stability will be disrupted, spirits will be dampened and even employment will be affected.

What a malady.

After 2015, when we examine the chart, it continued to move with the indexes again. We even witnessed a Saudi Arabia-America quarrel again when we said Covid-19 uncertainty etc. The stubbornness and what happened are obvious. Oil prices crashed and stock markets followed.

So what brought the markets down then? Was it the fall in oil prices or the emergence of the Covid-19 virus? Technical analysis does not look for reasons. Then, in the event of a possible resolution of the oil crisis, will the stock markets rise again?

We will all watch and see together. Before you put 50 liras in the tank, think about the effect of oil prices on stocks and the other things I mentioned.

Thank you.