What Will Happen to Stocks With Oil Below $40?

"I expect that if we dip below $40 sustainably, you will hear that drum beat of weaker global demand come back into play. But right now this seems to be supply-driven, with the reopening of the ports in Libya," said David Lebovitz, global market strategist at JPMorgan Asset Management, based in New York. "If we begin to see fears around another global growth scare, it's obviously going to be negative for risk assets."

According to Stefan Angelov, head of stocks trading at Varchev Finance, if the price of oil remains below 40$ per barrel, that would cause the earnings of oil drilling companies to drop. The oil-drilling sector is characterized by huge costs, which are bridge-financed by loans from banks. Those loans are planned to increase, as credit risk increases, they will become more expensive, which would leave both the oil and banking sectors vulnerable.

The biggest losses will be taken by deep water oil-drilling, and the smaller losses will be taken by the oil refineries.

Lower oil prices would lead to an increase in prices of stocks of airlines, but we do not expect strong bullish moods amongst investors due to risks from terrorist attacks. Therefore the energy sector is set to bring down the indices as it larger than the airline sector.

The lower crude oil prices would lead to a fall in the costs of domestic firms.

The drop in the oil prices is still considered temporary and the fundament for stocks is positive, however we could see a price correction with the price of indices of around 5%.

If the price of crude oil remains below 40 dollars, that would lead to increased geo-political risks and conflicts, which would further cause negative moods amongst stock market participants.