Comments on: Oil vs Dow: Does 2006 Rhyme with 1987?

By: Trent

Trent — Mon, 09 Apr 2007 22:09:03 +0000

There are a couple of reasons oil prices tend to move in the opposite direction of stock prices.

First, since oil is an expense (directly or indirectly) for most companies, higher oil prices tend to reduce earnings.

Second, stocks don’t like inflation. Since oil/energy is a sizable component of inflation indices, oil prices affect inflation, which lowers stock prices.

Third, shocks to the economy tend to benefit oil prices but hurt stocks. For example, extreme weather can cause increased energy use (more heating and air conditioning) but affect consumer’s willingness to spend and can leave retailers stuck with the wrong merchandise. This will hurt earnings and the stock prices.

Hope that helps.

By: Henry Montano

Henry Montano — Mon, 09 Apr 2007 21:57:30 +0000

Why does the price of oil affect the Dow Jones Average?

By: Trent

Trent — Wed, 13 Dec 2006 21:50:22 +0000

Both oil (as well as other commodities and stocks have tended to experience long-term cycles in valuation. In fact, they tend to follow the same cycle, only in opposite directions.

If you click on the article links that say “here” and “here” you will get to a more detailed description of why we think the current cycle (falling stock valuations and rising commodity valuations) is only about half-way completed.

Hope that helps.

By: alex

alex — Wed, 13 Dec 2006 21:25:26 +0000

what does oil prices have to do with the dow

By: alex

alex — Wed, 13 Dec 2006 21:25:06 +0000

what does oil have to do with the dow

By: Trent

Trent — Mon, 25 Sep 2006 11:39:49 +0000

Thank you for your comments. If you read some of our previous posts on oil (http://stockmarketbeat.com/blog1/category/energy/) you will find that we are quite focused on supply and demand, if not degree days. (We don’t think we can predict them so for our purposes they amount to noise.)

I would think the post makes it clear our interest in the oil price is not day-trading. And we would never suggest that it is good for anyone to invest without a solid thesis on why there will be strong fundamentals.

As you correctly point out, whether oil prices are rising or falling will be good for some investments and bad for others. So naturally we think it is important to figure out which way oil is going (if we think we can.)

By: Al Brockman

Al Brockman — Thu, 21 Sep 2006 18:09:40 +0000

Hi - You people are really something! Oil prices jumped dramatically over the past six months and that was BAD for the economy (but great for the traders). Now, oil prices have returned to their 12/2005 levels and that is a worse calamity!!!! Why was the economy doing well with oil at $30, $40 or $50????
A few years back, oil prices were based on supply, demand and forecasts of degree days. Now, if a trader sees a wart on his big toe (or other appendage), he shouts to all of his trader friends that the sky is falling and that oil prices are too low. One lemming follows the other, regardless of reality and prices climb. Then they all compliment each other on how good they are at commodities trading!!!Experts like you say that this is GOOD, regardless of how it affects non-traders. Need I remind you that an oil minister was quoted several months ago as saying that “the world is oversupplied with oil”. You all remind me of nothing more than the thousands of poor Indian villagers who try to make $15-$30 per day by day trading. As one was quoted, “It is more than I could make at a real job”.