It may not seem obvious, but energy and financial sectors have more in common than most would think. Whilst both operate in different ways, they both have a unique relationship which can often have an impact on other markets around the world.
As such, it is well worth looking at some of the ways that energy prices influence the financial sector, given that they constantly fluctuate and can be affected by so many factors. Here are some considerations.
One of the primary and most direct ways that energy prices affect the financial sector is through dictating business costs. Nearly all businesses use electricity in some form of other, so business electricity costs can have a direct impact on the profitability and overall operational costs of any given business type.
Since this goes for all businesses, this can have a major impact on all businesses collectively, potentially determining how successful/profitable they are in any given period. Energy prices will, of course, also affect the profits of energy providers (bearing in mind they need to keep them as low as possible to attract customers).
It is also worth looking at how banks are involved in the energy sector. Many are key investors in energy and natural resource companies, meaning that the price of energy could affect the returns they generate on investments in the likes of oil companies.
Many banks, for instance, have made loans to large oil and gas companies, which made sense when oil traded at over $100 per barrel. Many, however, took a hit as a global oil glut took hold, pushing the price (and thus profitability) of oil down and leading to significant financial losses for many companies and financial institutions.
Stocks and Shares
Given that energy prices have an impact on business costs, they may also have an indirect impact on the values of various stocks and shares. Significant leaps or falls in prices will affect the profitability of any company, especially those which use large amounts of energy, so there is plenty of scope for prices to bring the value of their shares up or down.
Of course, there are many other factors which affect the value of a business and its shares, but energy prices are bound to have at least some sway over this.
It seems markets are not as separated and independent as they may at first seem. In fact, if the relationship between energy prices and the financial sector is anything to go by, then they are incredibly interconnected.