Why are oil prices damaging the stock market?

The topic of oil prices continue to make daily headlines, but are leaving consumers with some basic questions unanswered. Stocks are having a poor start to the year, in fact the worst in recorded history. And this could be partly due to the plunge in oil prices.

Already we have experienced a 28% reduction in crude oil prices, pulling the overall index down by 9%. These low oil prices and fuel prices have been warmly welcomed by many consumers and businesses. However, they have also been faced with criticism, with experts concerned about the low prices. If we look back to 2007-08, ironically these experts were concerned about the prices being too high.

What is the reasoning for the low prices?The answer is simple, because we are extracting so much of it.  The previous long-running high prices enabled drillers to develop and test new techniques and search for new locations, in which they succeeded. These improved oil drilling techniques increased the amount of oil available on the global market due to a higher amount of extraction.  US production remains at a steady level, despite the low prices and lifting of international sanctions. Therefore, the US stockpiles have hit their highest levels in almost 80 years. Following this, experts have predicted that global oil supply could outstrip demand by 1.5m barrels a day.

How do low prices affect the stock market?These low prices has meant that oil companies profits are rapidly plummeting, along with their shares and therefore dragging the whole market down. Large investors are also selling off shares of companies that may be affiliated with the oil industry, like certain well-known banks. Financial experts are also worried that global economic growth will be much weaker than expected as a result of the oil prices.

Are lowers prices good for the economy?Lower oil prices aren’t always a good thing, it depends on the reason why they have been lowered. If it is because new supplies have been found, then this can have a positive effect on the wider economy. The best case scenario for the economy would be for oil prices to stay positive through transferring income from the oil producer to the oil consumers. However the latest reduction in oil prices shows that global growth is slowing down as businesses and consumers in many developing countries make cutbacks on spending.  Consumers are becoming more cautious about how they are spending their money and concentrating on saving more.

What would be the ideal situation?

Experts suggest that the best price would be one that is high enough for the producers to remain in business whilst still low enough to provide real benefits to the incomes of consumers. It has also been anticipated that the oil prices will level out by the end of next year as oil companies cut back on exploration and excessive production.