Increasing crude oil Price. Does it affect the Share Market?

A stock market is often said to be the economic barometer of a country. The stock market is highly sensitive to interest rates, political instability, policies and budgets, economic stability, and other several factors. However, I have tried to put forward the relationship between the stock market and the price of global crude oil.

An increase in crude oil prices directly affects the economy. It has the following effects on business and the economy as a whole,

1. Increases in foreign exchange outflow: For a country like Nepal, which is heavily dependent on the import of oil for energy consumption, the increase in oil price directly hits the exchange reserve thereby increasing the current account deficit. This will negatively impact the economy of the country.
2. Increase in Input and Transportation costs: The increase in oil prices will increase the price of production input and the cost of transportation. Thereby increasing the cost of production or business and reduction in the profit of the companies.
3. Increase in Inflation: The cost of oil is directly linked to inflation. There is a direct correlation between the fuel price and the inflation in a country. The increased inflation reduces the confidence of the investors and thereby negatively affects the stock market.

However, several studies are conducted to analyze the relationship between the crude oil price and the stock market but the direct relationship between these factors has not been established yet. Interestingly, the stock market in some instances is reacting contrary to the assumption of a negative correlation between these two parameters as depicted in the charts below.

This unexpected behavior of the market could be due to different factors affecting the share market and the oil prices. The price of oil is determined by the demand and supply factors whereas the stock market is always taken as a futuristic and is based on the anticipation of factors affecting the stock market.

However, we can find some correlation between the crude oil price and the stock market index. I have taken the annual data of 4 different indexes (Dow Jones Index, SSE Composite Index, Euronext Index, and Nepse Index) for the study purpose.

The relation between the index and the crude oil prices can be observed in the charts below:

Takeaway: Although it can be observed some correlation between the oil prices and the stock market movement, other studies suggest that the oil prices hardly affect the stock market. However, the companies which are heavily dependent on oil might get affected.

(Disclaimer: The analysis is only for the study and research purpose. You are advised to take your own considerations before investing)

CA Bimal Dhungel
Bimal.dhungel258@gmail.com