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Oil Prices Are Going Nowhere Next Year

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Goldman Sachs says oil prices are going nowhere next year. Oil prices have been long considered to impact the stock market but the impact on the market overall is difficulty to assess.

Certain industries such as the oil exploration industry and oil refiners are positively correlated with the stock market, while other companies that use oil as a component in their products or services are negatively correlated with oil prices.

In other words, when oil prices increase some industries are positively impacted while others are negatively impacted. While these trends are generally well understood, fluctuations in oil prices impact the stock market in other ways. When oil prices are accelerating, people tend to invest money into oil.

In the past this was typically done through investments into major oil manufacturers. Today, investors have access to investing directly in oil as a commodity through futures markets. Additional money invested into oil markets means that less money is allocated to the stock market which has a negative impact on stock prices.

Oil prices tend to be correlated, at least over the long-term, with inflation. While inflation is often viewed negatively by citizens, it is viewed positively by central bankers and economists who often promote limited inflation. Deflation is often commonly feared by investors and sharp decreases in oil prices may be viewed as deflationary.

Investors will monitor the change in oil prices and will often trade their stock market positions in accordance with their projection of how oil price fluctuations will impact other deflationary and inflationary pressures that they are identifying in the market.

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