Why oil prices move the stock market
Oil touches almost every part of the economy. Here is why changes in its price ripple through stocks, inflation and the Canadian dollar.
Oil is one of the most traded goods in the world. Its price feeds into gasoline, shipping, plastics, air travel and much more. So when oil moves sharply, the stock market often moves with it. But not every company is affected the same way.
How oil is priced
Oil is bought and sold worldwide, and its price changes every day. News reports usually quote one of two benchmarks:
- WTI, short for West Texas Intermediate, the main North American benchmark.
- Brent, crude from the North Sea, the main international benchmark.
Prices are quoted in US dollars per barrel.
What moves the price
- Supply. Decisions by large producers, including the group of oil-exporting countries known as OPEC, can raise or lower how much oil reaches the market.
- Demand. A growing world economy uses more oil. A slowing one uses less.
- Conflict and disruption. Wars, sanctions and damage to pipelines or ports can cut supply suddenly.
- Stockpiles. Weekly reports on how much oil is held in storage can move prices.
Winners and losers
Higher oil prices help some companies and hurt others.
- Energy producers usually gain. They earn more for every barrel they sell.
- Airlines, trucking and shipping usually lose. Fuel is one of their biggest costs.
- Shoppers have less to spend on other things when they pay more for fuel, which can hurt retailers.
Lower oil prices tend to do the reverse.
The link to inflation and interest rates
Energy costs feed into the price of almost everything. A big rise in oil can push inflation up.
That can lead investors to expect higher interest rates from central banks, which tends to weigh on stocks generally. See How interest rates move stock prices.
Why it matters more in Canada
Canada is a major oil producer and exporter. Energy companies make up a large part of the S&P/TSX Composite, so the TSX is often more sensitive to oil prices than the S&P 500.
The Canadian dollar has also tended to move with oil prices over time, though the link is not fixed.
Why the direction can flip
Sometimes stocks and oil rise together. That can happen when strong demand lifts both, because the economy is doing well.
Other times, rising oil hurts stocks. That is more likely when prices jump because of a supply shock rather than strong demand.
So the reason oil is moving matters as much as the move itself.
The short version
- Oil prices affect fuel, transport and the cost of many goods.
- Higher oil usually helps energy producers and hurts airlines and other heavy fuel users.
- Big oil price rises can push up inflation and interest rate expectations.
- The TSX and the Canadian dollar are often more sensitive to oil than US markets.
This is general information, not investment advice.
Updated