As we at Value Spectrum mentioned in a previous article, investors are mass selling their mining stocks. The reason for this is because in the past 3 months the mining industry has declined. There are plenty of reasons why the stock prices go up and down, and in this article we will examine what can drive down oil mining stocks.
Oil mining is a dominant industry in certain parts of the world, and countries that can export oil often experience a lot of growth. Despite its high demand, especially in developing countries, the price of oil is still being driven down by economic events.
In the U.S., the Energy Information Administration (EIA) Crude Oil stockpiles report is released every week in order to provide investors an outlook on the number of oil barrels and their derivatives. FXCM notes that the report tends to generate huge price volatility because oil prices have an impact on all economies around the world. Despite having a limited impact on currencies, the report tends to affect the prices of oil, and oil stocks and futures.
Apart from the EIA Crude Oil stockpiles report, two other factors that affect the prices of oil mining stocks are slow economic growth and low energy prices. Oil prices have a direct correlation with both of the aforementioned factors. When the economic growth of a country or energy prices are down, the value of mining stocks also tend to decline.
Due to the volatility of energy prices and economic growth, oil mining shares tend to be quite volatile as well. In a chart presented by the Kellogg Insight, you will see how the prices have gone up and down since the late 70s.
“The few recessions where we can name the culprit are oil-driven recessions,” said Kellogg School's finance professor Sergio Rebelo.
The cost of production to mine oil remains fixed. Yet, a reduction in energy prices affects mining operations tremendously.
Energy prices have always been measured by their current supply and demand. However, even if the demand is high, production will still be low if there are no refineries to produce the oil. CNBC reported that back in 2017, refinery outages contributed to the decreased supply and price of oil. Refinery outages are a serious problem for oil producers because it greatly reduces the supply chain of oil, which in turn drives oil mining stocks down.
When high-energy prices continue for long periods, producers tend to increase their production. In contrast, when low energy prices drag for a long period of time, producers decrease their production, thereby affecting the prices of oil mining stocks.
Oil’s demand is very erratic, and this affects the stock prices of oil mining during a short-term period. Changes in the demand for the commodity are determined by the changes in a country’s economic growth. Changes in economic activity are connected to consumer trends, and these lead to a fluctuation of oil consumption. When economic growth is slow, or is anticipated to drag in the near future, oil mining stocks immediately begin to decline.
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