Why would the stock market plunge on oil price crashes?

Question

There are lots of news headlines on 3/9/2020 that read like this:

"Saudi Oil Price Cut is a market shock"

"Oil price war threatens widespread collateral damage"

"low oil prices could damage the US economy"

However, in one of those articles, it also states things like this:

Big importing nations could get some much needed relief from falling energy bills ... consumers benefit in general from lower oil prices ...

Shouldn't lower oil price lower the cost for lots of industries (except the oil/energy industry), stimulate the economy and as a consequence buoy the stock market? What am I missing here?

Answer 1

There is a lot going on right now. Market volatility rose over the past 2 weeks on the news that Covid-19 cases are growing exponentially. It would be folly to try and correlate a large move on a particular day to other seemingly unrelated news.

For that matter, in the midst of people trying to avoid crowds, many industries might suffer. Airlines, cruise ships, any function where large groups might gather. Say the payroll tax is briefly suspended. The $50K earner sees $70/wk more in their paycheck. Will that counter their desire to avoid the crowd? Airlines can't fill seats at any price. Where will that $70 go? Probably to pay the next rent or utility bill. Zero effect on the economy.

The impact of OPEC failing to reach an agreement might have had far different results in normal times, if such a thing exists.

Answer 2

The U.S. recently became an oil and natural-gas exporter and actually a net exporter. With the oil price declining, West Texas fracking is now at real risk.

But the oil industry is not the dominant industry in the U.S. and so the ruble is down against the US dollar. Also, neither the euro or the Swiss franc should have any particular advantage over the dollar. The U.S. stock market should actually hold on the oil price shock.

Now if the lower oil price pushes inflation lower then the various central bank polices of increasing inflation don't make very much sense. The central banks say that since growth causes inflation that they can then create inflation so as to lead to growth. A lower oil price will point towards deflation except that the lower of cost of oil to industry could increase corporate profit margins and increase economic activity.

Oh, the current oil price crash is due to an expected increase in supply and that should not have hurt the stock market. But future oil price pullbacks due to reduced demand, as due to a possible epidemic, should hurt the stock market because reduced demand for oil represents reduced economic activity.

Answer 3

Oil prices is often used as short-hand for economic activity, e.g. oil used in the transport of things made by companies, often in other countries.

If the oil price decreases it may be seen as a result of decreased demand (of transported things) and thus a decrease in demand in general for things.

Thus share prices decrease because companies selling fewer things have less money for shareholders.

Answer 4

In addition to the fact that stock markets do not like sudden changes, the nature of the American oil industry could result in a negative impact to the financial sector as well. Unlike many countries, the American oil industry has a large number of smaller companies. Many of these companies are highly leveraged (i.e. a lot of debt) and will struggle to be cash flow positive with oil prices in the $30's. If there are large number of bankruptcies, that could put strain on the financial industry which would have a much greater effect on the economy overall.

Also, there can be localized effects. Overall lower oil prices are good for consumers, but for energy producing areas in states such as Texas, Wyoming, and the Dakotas it will be a negative to their economies.

Answer 5

Oil does not provide profits only for the oil industry. Oil provides a lot of profits also for those involved in the mediation. A big chunk of the financial sector gets a cut on the oil sales and in the western world the tertiary sector matters more than the industry.

Answer 6

The oil price is a symptom not a cause.

The real sequence is

1. Coronavirus
2. Near complete shutdown of airline, travel and leisure industries, severe supply chain difficulties impacting on international shipping and all manufacturing, etc. etc.
3. Emergency bank base rate cuts leading to
4. Decimated profitability of many banks and insurers, and
5. Worries about funding of pension obligations, about corporate debt, about financial crisis two.

It's too early to know if the coming recession is V shaped, U shaped or even L shaped. At some point the market will start sorting the dead men walking from the walking wounded from the few companies with excellent future prospects arising from the elimination of weaker competitors. This will take a while. I have dipped a toe in, buying companies that are neither consumer-facing nor highly indebted, at prices that would have been seen as huge bargains three months ago. Needless to say they are all below the price I paid at present. As long as it's not an L shaped depression, I hope to come out on top.

As for the oil price, that ought to be helpful to airlines and suchlike, but not until people are allowed to travel and until people want to travel for fun. The virus epidemic has to end first, or become so universal that there is no point trying to keep it out of anywhere.

Don't ask me what the Saudis are up to. I cannot make sense of their actions. Maybe its political and they want to give Russia a bloody nose and Iran something far worse? USA shale oil wells won't cease to exist just because its not profitable to drill new ones. Shutting them in for now will actually mean they flow better when the oil price recovers. Do the Saudis realize they are no longer the world's swing producer? That is now the USA. Shale wells do not take long to drill and put into production once it is again profitable to do so.

If you think the oil price is crazy, why is the price of a manufacturer of soap, hand sanitizer and moisturizing cream down with everything else?