Oil prices are down more than 6%. Why could this be bad for the stock market?
The cost of oil has returned to the level it was before Israel began bombing Iran
In trading on June 24, oil prices collapsed for the second consecutive session. In addition to the market's hopes for a ceasefire between Israel and Iran, Donald Trump also «allowed» China to continue buying oil from Iran. Market participants saw the move as Washington easing pressure on Tehran amid its truce with Tel Aviv and shifting Trump's focus to lower oil prices. However, a MarketWatch columnist warns: low commodity prices are not always good for the stock market.
Details
The cost of Brent crude oil contracts on Tuesday, June 24, fell by more than 6% to $66.8 per barrel. U.S. West Texas Intermediate (WTI) futures also dropped by about the same amount to $64. This is the second consecutive session of decline: on Monday, both grades lost about 8% each amid hopes for an end to the conflict between Iran and Israel. Crude prices are now back to the levels they were before Israel began bombing Iran on June 13, notes CNBC.
Oil prices fell sharply on Tuesday after US President Donald Trumpsaid that China «can continue to buy oil from Iran.» «I hope they will actively buy from the United States as well. I was honored to make this happen!», Trump added in a post on Truth Social.
Back in May, he threatened to ban countries that buy oil from Iran from doing business with the United States. Trump's statement on Tuesday was seen by traders as a sign that Washington is loosening its strategy to pressure Tehran in the wake of the ceasefire with Israel, CNBC noted.
«Trump has always been reluctant to take Iranian oil off the market given how it pushes prices up,» Matt Smith, lead oil analyst at Kpler, told CNBC. - Now he no longer has a beef with Iran, given its weakened nuclear capabilities. His [Trump's] focus has shifted to lowering oil prices.»
Why this could be bad for the stock market
Falling oil prices could also mean a falling stock market, considers MarketWatch columnist Mark Hulbert. The correlation used to be reversed: Before 2000, if oil prices rose, the stock market would slump the next month - and vice versa. But now the situation has changed, and over the past 25 years, the correlation has become direct: the S&P 500 Index has performed better on average following higher oil prices, Halbert writes.
The situation could have changed due to the rapid growth in U.S. oil production over the past two decades, which has made the country's economy less vulnerable to external shocks in the oil market, the MarketWatch author suggests. Another factor could have been the global financial crisis of 2008-2009, when Wall Street feared deflation and, accordingly, perceived rising oil prices as a signal of a stronger economy, he added.
This article was AI-translated and verified by a human editor
