Crude oil breached the level of $30 per barrel this month when it plunged due to oversupply woes. From a high of $115 per barrel in June 2014, it is now at a level last seen in 2004. Crude oil is one of the most closely watched and monitored commodities as it has lots of implications for countries and companies.
In the equity market, the oil-price movement has direct repercussions for many sectors. Sectors like paint and plastic are dependent on oil for their raw materials and thus the margins of pain and plastic companies can fluctuate to a degree. But few sectors move as perfectly in correlation with crude-oil prices as oil-marketing companies, oil-extraction companies and the airlines sector.
Movement in the stocks of oil-marketing companies is inversely correlated to oil prices because when crude oil falls, refineries save raw-material costs and improve their margins. Similarly, the airline sector has oil as the major component of its recurring costs and thus aviation shares do well when oil prices go down. But oil-extraction companies benchmark their selling price to that of the international oil price, and hence when it falls the stocks of oil-extracting companies also fall.
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