Oil production reduction agreement and the stock market

[sanfanciscotreat]

What is the rationale of the commonly held notion that the decrease in oil production correlates with a move up in the stock markets?

 

[FiveDriver]

IMO, the Dow and SP500 are rising because the Energy companies are well represented in those averages. If you just look at sector performance......Energy is far and away the best sector.

 

[MooreBonds]

IMO, the Dow and SP500 are rising because the Energy companies are well represented in those averages. If you just look at sector performance......Energy is far and away the best sector.

Also, because it is a large sector of our economy, slightly higher oil prices means more domestic production....which means more domestic jobs. Oil will not see something high like $70 again, so the market isn't worried about eventual price surges or high inflation due to energy - but the incremental changes above about $50/barrel are enough to maintain or slightly grow domestic production enough to help keep the domestic industry on life-support.

The market knows that if oil were to rise to $70 again (or more), domestic producers would rush the gates to start production - which would quickly bring the equilibrium price back down to about $50, and then force some to shut down. That, or the Saudi's would feel threatened enough to increase production (or tell other OPEC members to increase) to the point of driving the price back down to $40 to shut down all but the lowest of the low-cost domestic producers.

So when the price temporarily rises to $50 or so, the market knows not to fear a run to $70+...but is, instead, seeing more domestic jobs.

 

[GrayHare]

Energy prices are connected to inflation, so higher energy costs mean more inflation. More inflation means bonds are a poorer investment, so money shifts to stocks.

 

[Totoro]

I never understood that claim either.

Any raw material going up in price means less abundance, and harder to do things with it. In the short term it does drive up the price of some megacorps in the energy sector, sure. In the long run it's bad for everyone else.

It may be a case of inverse correlation though. Strong economies ask for more raw materials, so it tends to go up in price.

For that matter, one just as well may be celebrating coffee prices going up, or metal. Or I'm just a simpleton ..