8 ms·

Can anyone explain how exactly cheap oil makes the stock market crash? Gas companies do not make up most of the stock market. Cheap energy means cheap everythin

by setra 11y ago

Can anyone explain how exactly cheap oil makes the stock market crash? Gas companies do not make up most of the stock market. Cheap energy means cheap everything else. Sense when does cheap energy cause everything else to crash?

Iv 11y ago
Cheap gas means cheap transport, means cheap energy, means cheap manufacturing. It is good for the economy. The thing is, it takes adjustment and stability for these benefits to work out. And also, too much of our economy is tied over speculation on oil related goods. If the oil prices stay low (which is totally unsure) then it will be beneficial over the course of a few year, but right now the economy is adjusting.
- kuschku 11y ago
  In general, even, "And also, too much of our economy is tied over speculation."
akgoel 11y ago
cheap oil is not the cause of the market crash, but rather they are both caused by the same problem - fear of recession/depression. Cheap oil (along with many other commodities) have been falling quickly over the past 15 months. Increasing supply combined with "China contagion", ie lower demand growth, have caused inventories to rise. In this case, oil becomes a proxy for "demand", and since it keeps building, that means global economies are not growing. This is further exacerbated by quantitative easing policies that encouraged investment in the past 7 years where-ever there might have been any sort of return. This kept the economy afloat, but it could be argued that it was keeping a zombie economy afloat. These policies are now coming home to roost - over-investment led to oversupply now meets lack of demand.
- coldcode 11y ago
  Stock prices are always inversely correlated to fear.
  - tosseraccount 11y ago
    You sure? We can measure stock prices. Can we measure fear?
    - pg_is_a_butt 11y ago
      yes. you have much of it. i'm sure.
lmm 11y ago
The argument is the opposite direction: if companies don't expect to be selling many products in the near future, they'll cut their orders for materials. So a fall in commodity prices can be the first sign of a coming recession. (In this particular case it seems that the fall in oil prices is more about increased supply than lower demand. As Nevsky famously said recently, historically logical correlations between different asset classes can remain in place long after they have ceased to be logical)
- tomp 11y ago
  > the fall in oil prices is more about increased supply than lower demand Even so, it's worrying. It means that oil companies have (collectively) predicted a much higher future demand growth than realized. This suggests that the world's economies aren't growing as quickly as they used to (many fingers are pointed at China), and could spell troubles for other industries who have also invested heavily, anticipating future growth that won't come (so soon).
  - gaius 11y ago
    No it doesn't, it's political.
    - ashark 11y ago
      Are the Saudis hoping they can limit the benefit (to Iran) of the opening of Iran's markets enough to tip the scales the next time there's a decision to be made about either defying the West or keeping markets open, such that they become isolated again? All that I've read about their recent moves claims that they're doing it to counter Iran, but that doesn't seem like it'll work long-term unless they expect Iran to be out of the game again fairly soon. Otherwise they're just wasting money for a delaying tactic.
      - rrrx3 11y ago
        The Saudis are doing it not just to counter Iran - they also have to compete with South American, Canadian, American, and Russian oil. They've increased the volume of production to keep the prices artificially low in order to squeeze all of those players out of the market. It's also why Russia has a vested interest to act in Syria, propping up the Assad regime - to keep their oil under the control of an entity friendly to their interests.
imtringued 11y ago
The reason is largely physological. The stock market traders think oil price is an indicator for demand. When demand goes (=oil price) down this indicates the end of a bull market and the begin of a bear market. So obviously they want to sell their stocks before the price goes down naturally which causes a stockmarket crash.
- DougN7 11y ago
  Which would mean that when other producers see that demand for _their_ products hasn't actually fallen (and hopefully rises because gas-buying consumers have more money in their pockets), we should see a nice bounce back in stock prices for everyone but oil?
at-fates-hands 11y ago
At a simple level its supply and demand. We currently have a high supply and low demand (less travel during the winter months) which in turn drives down prices. Lower prices, means the energy sector is making less, when it makes less, people don't invest because it won't make you any money. At a more complex level, you have a war between US oil producers and OPEC (Organization of the Petroleum Exporting Countries). OPEC wants to put the US oil producers out of business. The US producers have started to give OPEC competition, driving down oil prices. The result has been an oil boom to oil crash. Lots of companies that were hiring are not hiring and in some cases, cutting jobs. Cutting jobs impacts employment numbers, employment numbers affect investments, the fed rate and a whole host of other things. While the energy sector won't make the market crash by iteself per se, it will certainly drag it down and make investors a lot more skittish to put more money into the market - having the effect we're currently experiencing.
HenryTheHorse 11y ago
There's at least 35 companies in S&P500 directly related to Oil & Gas (equipment, drilling, distribution, refining etc). While 7% is not "over-represented", but it's not insignificant either. How would S&P performance look without these 35 companies? The Guardian actually covered that in a short article last month. http://www.theguardian.com/business/2016/jan/21/oil-prices-stock-market-us-recession-economy http://www.theguardian.com/business/2016/jan/21/oil-prices-s...
- delazeur 11y ago
  There are also a number of companies (some in the S&P 500, more of them not), that get all or most of their revenue by providing services to the "obviously" oil & gas companies. You've got large steel and railroad companies, then you've got small contractors providing welders/machinists/millwrights/etc.
  - HenryTheHorse 11y ago
    Indeed. I have personally worked with two such companies that sold equipment and services to oil and mining companies. Both those sectors have been hit hard and their suppliers (esp. ones who had not diversified well) were hit in turn.
deleted 11y ago
[deleted]
qaq 11y ago
There are a lot of interrelated factors. You can take any commodity and produce infinite number of similar articles "Where commodity X goes market goes".
api 11y ago
Oil is the rate limiting reagent for industry, so causation goes the other way. A rapid oil crash is a clear indicator of a slowdown.
- cubano 11y ago
  That is only one side of the equation. Due to rapid technological advances in shale oil extraction (ie fracking), North American companies have radically changed the daily global supply of oil, which of course puts downward price pressure on it. Much of the recent price drop can be defined in terms of Saudi's getting into a price war with these NA companies, trying to push them off the market. Not only that, but this technology is a long-term game changer, ie it will be only a matter of time before all the world oil players (Russia, Venezuela, etc) co-opt this tech and start extracting much cheaper oil from their fields, which of course the markets are anticipating as well.
  - api 11y ago
    Hmm... and combine with EVs coming of age, a Moore's Law type growth curve for solar (and solar EROEI), etc., and perhaps the high energy costs of the recent past are gone for a while. I have to admit I'm surprised. I totally bought the idea that oil would never be this cheap again for fundamental physical reasons. But perhaps that made it a bubble. A true bubble must have a "story" about how it's "different this time" that manages to convince huge numbers of people.
    - cubano 11y ago
      You wouldn't be the first person to be on the losing side of a bet against the technical and capitalistic abilities of American business.
      - api 11y ago
        Luckily, I made no (financial) bet. :)
- ajmurmann 11y ago
deleted 11y ago
[deleted]
saganus 11y ago
When reading about the markets and in general, finance stuff (which I do and enjoy actually), there are times that I feel as if we have just entangled ourselves in the most epic, largest and most complex system of epicycles on epicycles that we have ever seen. I know this is very simplistic, and in the end there is probably some reason below all of this... but sometimes, it just doesn't look like it.
ktRolster 11y ago
Alan S Blinder recently pointed out that cheap oil is mostly good for the economy (except in North Dakota and Iran). He also pointed out that markets can stay irrational for a long time. I don't think oil is the cause of the market drop: stocks had been overbought for a while (if you look at historic P/E ratios), so it is natural for it to return to normal. Also, the increasing interest rate is going to put downward pressure on the stock market, even if the economy does well. Right now that is what I consider to be the main cause of the drop. What I mean is: In the market, there are day-traders, and long-term traders. The day traders are mostly responsible for the day-to-day gyrations of the market, and they've been looking at the price of oil as something to follow. Underneath that, though, the long-term traders have been removing money from the market (leaving it in cash, or switching to bonds), so even after the day traders get done, there is still a net negative. Of course, that's a simplification for explanation purposes because I don't want to write a book here.
- seletz 11y ago
  > ... (except North Dakota and Iran) ... And Norway, and Russia, and probably others. The economy in Norway looks pretty bad right now. And Russia is having very bad times right now I believe. At least in Norway it's because the oil price is way to low for them -- I heard that they break-even at $60 or $70 per barrel. That's pretty bad if practically the whole economy is based on oil.
  - effie 11y ago
    Not whole economy is based on oil. It makes 30% of revenue and 50% of exports. https://www.regjeringen.no/no/aktuelt/the-norwegian-experience-in-the-oil-and-/id726975/ https://www.regjeringen.no/no/aktuelt/the-norwegian-experien...
    - dforrestwilson1 11y ago
      50% of exports is pretty bad in a world where you need/want things like iPhones and don't make them yourself. We're all very connected at this point.
grandalf 11y ago
consider this simple proof: price is a function of supply and demand. oil prices are low because demand for oil is low oil is an input into nearly every aspect of the economy thus low demand for oil could imply low demand for goods for which oil is an input (it could also reveal some kind of major efficiency improvement or the presence of some substitute for oil (or an increase in the supply of oil).
- ZanyProgrammer 11y ago
  Or oil prices are low because the supply of oil has increased.
  - ajmurmann 11y ago
    Yeah, I thought it was pretty established that even before sanctions against Iran had been lifted production already had gone up especially in the US through fracking.
  - tosseraccount 11y ago
    False assumption in a proof?
  - grandalf 11y ago
    that could also be the case. Or the increase could be a combination of changes in supply and changes in demand.
Hermel 11y ago
Cheap oil means countries such as Saudi Arabia must sell stocks in order to finance their expenses. Together, state owned oil funds own a single-digit percentage of all publicly listed stocks.
dpweb 11y ago
People have demonstrated that oil prices (especially in the short term) do not simply reflect supply and demand. It's a naive view. Especially as more "pure" speculators enter the market. They call this more "fast money" in the mkt. More highly leveraged participants, etc.. Those speculators impact price and generally speaking selling begets more selling and vice-versa - and you get a more volatile market. It has only been established a recent correlation between equities and oil. There could very well be factors driving both markets in the same direction, or it could be (and most people don't like to accept the concept) a good old-fashioned coincidence.
amalag 11y ago
There was a nice article on seeking alpha which speculated that sovereign funds of countries like Norway and middle eastern countries used the opportunity of high equity prices and low oil prices to sell. This large selling pressure has give some drop in prices. That makes sense to me. There has to be selling pressure to lower prices and I think that is a good cause.
the_economist 11y ago
Public banks have massive loans to oil producers. When oil goes down, much of this production becomes unprofitable, leaking to bankruptcies and defaulting on those loans. So oil affects the banking sector, too.
chvid 11y ago
There used to be something called the petrodollar: https://en.wikipedia.org/wiki/Petrodollar_recycling https://en.wikipedia.org/wiki/Petrodollar_recycling The idea that the major oil producers earned such a windfall that their money immediately would be sent back to the west in form of investment. Today I think it is more complex and the low oil price is both a cause and a symptom of something that is mostly not so good.
dageshi 11y ago
Cheap money. Plenty of people have had years to buy assets with cheaply borrowed money. The Fed increased interest rates, people started to unwind their positions in oil and the stock market, that sets off a self reinforcing cycle that pushes prices lower forcing more people to sell in order to break even or limit losses.
PaulHoule 11y ago
For a while, hedge funds such as Bridgewater have built a correlation between oil and stocks in their models. Bridgewater's all-weather fund did badly in the last two years. The CNBC anchors were bought into this and they were quite surprised that the oil price plunged and the stock market stayed high as long as it did.
bobwaycott 11y ago
"Sense when ..." I believe you wanted "Since when..."

by setra 11y ago

Iv 11y ago

Cheap gas means cheap transport, means cheap energy, means cheap manufacturing. It is good for the economy. The thing is, it takes adjustment and stability for these benefits to work out. And also, too much of our economy is tied over speculation on oil related goods. If the oil prices stay low (which is totally unsure) then it will be beneficial over the course of a few year, but right now the economy is adjusting.

kuschku 11y ago
In general, even, "And also, too much of our economy is tied over speculation."

akgoel 11y ago

cheap oil is not the cause of the market crash, but rather they are both caused by the same problem - fear of recession/depression. Cheap oil (along with many other commodities) have been falling quickly over the past 15 months. Increasing supply combined with "China contagion", ie lower demand growth, have caused inventories to rise. In this case, oil becomes a proxy for "demand", and since it keeps building, that means global economies are not growing. This is further exacerbated by quantitative easing policies that encouraged investment in the past 7 years where-ever there might have been any sort of return. This kept the economy afloat, but it could be argued that it was keeping a zombie economy afloat. These policies are now coming home to roost - over-investment led to oversupply now meets lack of demand.

coldcode 11y ago
Stock prices are always inversely correlated to fear.
- tosseraccount 11y ago
  You sure? We can measure stock prices. Can we measure fear?
  - pg_is_a_butt 11y ago
    yes. you have much of it. i'm sure.

lmm 11y ago

The argument is the opposite direction: if companies don't expect to be selling many products in the near future, they'll cut their orders for materials. So a fall in commodity prices can be the first sign of a coming recession. (In this particular case it seems that the fall in oil prices is more about increased supply than lower demand. As Nevsky famously said recently, historically logical correlations between different asset classes can remain in place long after they have ceased to be logical)

tomp 11y ago
> the fall in oil prices is more about increased supply than lower demand Even so, it's worrying. It means that oil companies have (collectively) predicted a much higher future demand growth than realized. This suggests that the world's economies aren't growing as quickly as they used to (many fingers are pointed at China), and could spell troubles for other industries who have also invested heavily, anticipating future growth that won't come (so soon).
- gaius 11y ago
  No it doesn't, it's political.
  - ashark 11y ago
    Are the Saudis hoping they can limit the benefit (to Iran) of the opening of Iran's markets enough to tip the scales the next time there's a decision to be made about either defying the West or keeping markets open, such that they become isolated again? All that I've read about their recent moves claims that they're doing it to counter Iran, but that doesn't seem like it'll work long-term unless they expect Iran to be out of the game again fairly soon. Otherwise they're just wasting money for a delaying tactic.
    - rrrx3 11y ago
      The Saudis are doing it not just to counter Iran - they also have to compete with South American, Canadian, American, and Russian oil. They've increased the volume of production to keep the prices artificially low in order to squeeze all of those players out of the market. It's also why Russia has a vested interest to act in Syria, propping up the Assad regime - to keep their oil under the control of an entity friendly to their interests.

imtringued 11y ago

The reason is largely physological. The stock market traders think oil price is an indicator for demand. When demand goes (=oil price) down this indicates the end of a bull market and the begin of a bear market. So obviously they want to sell their stocks before the price goes down naturally which causes a stockmarket crash.

DougN7 11y ago
Which would mean that when other producers see that demand for _their_ products hasn't actually fallen (and hopefully rises because gas-buying consumers have more money in their pockets), we should see a nice bounce back in stock prices for everyone but oil?

at-fates-hands 11y ago

At a simple level its supply and demand. We currently have a high supply and low demand (less travel during the winter months) which in turn drives down prices. Lower prices, means the energy sector is making less, when it makes less, people don't invest because it won't make you any money. At a more complex level, you have a war between US oil producers and OPEC (Organization of the Petroleum Exporting Countries). OPEC wants to put the US oil producers out of business. The US producers have started to give OPEC competition, driving down oil prices. The result has been an oil boom to oil crash. Lots of companies that were hiring are not hiring and in some cases, cutting jobs. Cutting jobs impacts employment numbers, employment numbers affect investments, the fed rate and a whole host of other things. While the energy sector won't make the market crash by iteself per se, it will certainly drag it down and make investors a lot more skittish to put more money into the market - having the effect we're currently experiencing.

HenryTheHorse 11y ago

There's at least 35 companies in S&P500 directly related to Oil & Gas (equipment, drilling, distribution, refining etc). While 7% is not "over-represented", but it's not insignificant either. How would S&P performance look without these 35 companies? The Guardian actually covered that in a short article last month. http://www.theguardian.com/business/2016/jan/21/oil-prices-stock-market-us-recession-economy http://www.theguardian.com/business/2016/jan/21/oil-prices-s...

delazeur 11y ago
There are also a number of companies (some in the S&P 500, more of them not), that get all or most of their revenue by providing services to the "obviously" oil & gas companies. You've got large steel and railroad companies, then you've got small contractors providing welders/machinists/millwrights/etc.
- HenryTheHorse 11y ago
  Indeed. I have personally worked with two such companies that sold equipment and services to oil and mining companies. Both those sectors have been hit hard and their suppliers (esp. ones who had not diversified well) were hit in turn.

deleted 11y ago

[deleted]

qaq 11y ago

There are a lot of interrelated factors. You can take any commodity and produce infinite number of similar articles "Where commodity X goes market goes".

api 11y ago

Oil is the rate limiting reagent for industry, so causation goes the other way. A rapid oil crash is a clear indicator of a slowdown.

cubano 11y ago
That is only one side of the equation. Due to rapid technological advances in shale oil extraction (ie fracking), North American companies have radically changed the daily global supply of oil, which of course puts downward price pressure on it. Much of the recent price drop can be defined in terms of Saudi's getting into a price war with these NA companies, trying to push them off the market. Not only that, but this technology is a long-term game changer, ie it will be only a matter of time before all the world oil players (Russia, Venezuela, etc) co-opt this tech and start extracting much cheaper oil from their fields, which of course the markets are anticipating as well.
- api 11y ago
  Hmm... and combine with EVs coming of age, a Moore's Law type growth curve for solar (and solar EROEI), etc., and perhaps the high energy costs of the recent past are gone for a while. I have to admit I'm surprised. I totally bought the idea that oil would never be this cheap again for fundamental physical reasons. But perhaps that made it a bubble. A true bubble must have a "story" about how it's "different this time" that manages to convince huge numbers of people.
  - cubano 11y ago
    You wouldn't be the first person to be on the losing side of a bet against the technical and capitalistic abilities of American business.
    - api 11y ago
      Luckily, I made no (financial) bet. :)
ajmurmann 11y ago

deleted 11y ago

[deleted]

saganus 11y ago

When reading about the markets and in general, finance stuff (which I do and enjoy actually), there are times that I feel as if we have just entangled ourselves in the most epic, largest and most complex system of epicycles on epicycles that we have ever seen. I know this is very simplistic, and in the end there is probably some reason below all of this... but sometimes, it just doesn't look like it.

ktRolster 11y ago

Alan S Blinder recently pointed out that cheap oil is mostly good for the economy (except in North Dakota and Iran). He also pointed out that markets can stay irrational for a long time. I don't think oil is the cause of the market drop: stocks had been overbought for a while (if you look at historic P/E ratios), so it is natural for it to return to normal. Also, the increasing interest rate is going to put downward pressure on the stock market, even if the economy does well. Right now that is what I consider to be the main cause of the drop. What I mean is: In the market, there are day-traders, and long-term traders. The day traders are mostly responsible for the day-to-day gyrations of the market, and they've been looking at the price of oil as something to follow. Underneath that, though, the long-term traders have been removing money from the market (leaving it in cash, or switching to bonds), so even after the day traders get done, there is still a net negative. Of course, that's a simplification for explanation purposes because I don't want to write a book here.

seletz 11y ago
> ... (except North Dakota and Iran) ... And Norway, and Russia, and probably others. The economy in Norway looks pretty bad right now. And Russia is having very bad times right now I believe. At least in Norway it's because the oil price is way to low for them -- I heard that they break-even at $60 or $70 per barrel. That's pretty bad if practically the whole economy is based on oil.
- effie 11y ago
  Not whole economy is based on oil. It makes 30% of revenue and 50% of exports. https://www.regjeringen.no/no/aktuelt/the-norwegian-experience-in-the-oil-and-/id726975/ https://www.regjeringen.no/no/aktuelt/the-norwegian-experien...
  - dforrestwilson1 11y ago
    50% of exports is pretty bad in a world where you need/want things like iPhones and don't make them yourself. We're all very connected at this point.

grandalf 11y ago

consider this simple proof: price is a function of supply and demand. oil prices are low because demand for oil is low oil is an input into nearly every aspect of the economy thus low demand for oil could imply low demand for goods for which oil is an input (it could also reveal some kind of major efficiency improvement or the presence of some substitute for oil (or an increase in the supply of oil).

ZanyProgrammer 11y ago
Or oil prices are low because the supply of oil has increased.
- ajmurmann 11y ago
  Yeah, I thought it was pretty established that even before sanctions against Iran had been lifted production already had gone up especially in the US through fracking.
- tosseraccount 11y ago
  False assumption in a proof?
- grandalf 11y ago
  that could also be the case. Or the increase could be a combination of changes in supply and changes in demand.

Hermel 11y ago

Cheap oil means countries such as Saudi Arabia must sell stocks in order to finance their expenses. Together, state owned oil funds own a single-digit percentage of all publicly listed stocks.

dpweb 11y ago

People have demonstrated that oil prices (especially in the short term) do not simply reflect supply and demand. It's a naive view. Especially as more "pure" speculators enter the market. They call this more "fast money" in the mkt. More highly leveraged participants, etc.. Those speculators impact price and generally speaking selling begets more selling and vice-versa - and you get a more volatile market. It has only been established a recent correlation between equities and oil. There could very well be factors driving both markets in the same direction, or it could be (and most people don't like to accept the concept) a good old-fashioned coincidence.

amalag 11y ago

There was a nice article on seeking alpha which speculated that sovereign funds of countries like Norway and middle eastern countries used the opportunity of high equity prices and low oil prices to sell. This large selling pressure has give some drop in prices. That makes sense to me. There has to be selling pressure to lower prices and I think that is a good cause.

the_economist 11y ago

Public banks have massive loans to oil producers. When oil goes down, much of this production becomes unprofitable, leaking to bankruptcies and defaulting on those loans. So oil affects the banking sector, too.

chvid 11y ago

There used to be something called the petrodollar: https://en.wikipedia.org/wiki/Petrodollar_recycling https://en.wikipedia.org/wiki/Petrodollar_recycling The idea that the major oil producers earned such a windfall that their money immediately would be sent back to the west in form of investment. Today I think it is more complex and the low oil price is both a cause and a symptom of something that is mostly not so good.

dageshi 11y ago

Cheap money. Plenty of people have had years to buy assets with cheaply borrowed money. The Fed increased interest rates, people started to unwind their positions in oil and the stock market, that sets off a self reinforcing cycle that pushes prices lower forcing more people to sell in order to break even or limit losses.

PaulHoule 11y ago

For a while, hedge funds such as Bridgewater have built a correlation between oil and stocks in their models. Bridgewater's all-weather fund did badly in the last two years. The CNBC anchors were bought into this and they were quite surprised that the oil price plunged and the stock market stayed high as long as it did.

bobwaycott 11y ago

"Sense when ..." I believe you wanted "Since when..."