The effect of oil price shocks on stock market performance in selected African countries

• Published date: 01 December 2023
• Author: Chukwuemelie C. Okpezune,Mehdi Seraj,Huseyin Ozdeser
• Date: 01 December 2023
• DOI: http://doi.org/10.1111/opec.12288

OPEC Energy Rev. 2023;47:287–305.

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287wileyonlinelibrary.com/journal/opec

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INTRODUCTION

Academics and investors are still researching how oil price anomalies influence stock market price shocks from sectoral,

global, national and international viewpoints. Crude oil's worth has increased recently, showing its significance to every

sector of the economy worldwide (Gourène & Mendy,2018).

Studies on how oil prices affect stock markets, including their impact on business liquidity and profitability, have been

done, indicating that oil has a considerable impact on several global economic sectors (Badeeb & Lean,2018). The IEA

reports that oil accounts for almost 40 per cent of global fuel consumption, and its usage remains strong despite increased

efforts to promote renewable and alternative energy sources (Gourene & Mendy, 2018). Oil prices are among the most

influential factors in macroeconomic and financial variables due to their key role in production, according to Cifarelli

and Paladino(2010).

Oil price fluctuations may have a significant impact on the financial markets of both developed and develop-

ing countries. This is especially true for African countries, such as Nigeria, Ghana, Congo, Chad, Gabon, Libya,

Egypt, Algeria, Angola, Côte d'Ivoire, Senegal and South Africa, which have become major regional or global oil

producers in the past four decades (Gourène & Mendy,2018). These price shocks can affect monetary policy, in-

flation and corporate earnings. The African Petroleum Producers Association (APPA), which was established in

1987 to encourage knowledge and experience exchange among African oil producers, is proof of this (Gourène &

Mendy,2018).

DOI: 10.1111/opec.12288

ORIGINAL ARTICLE

The effect of oil price shocks on stock market performance

in selected African countries

Chukwuemelie C.Okpezune

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MehdiSeraj

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HuseyinOzdeser

© 2023 Organization of the Petroleum Exporting Countries.

Department of Economics, Near East

University, Nicosia, Cyprus

Correspondence

Mehdi Seraj, Department of Economics,

Near East University, Nicosia, North

Cyprus.

Email: mehdi.seraj@neu.edu.tr

Abstract

The study's objective was to investigate how changes in oil prices affect stock

market performance. The study's population consisted of selected African coun-

tries chosen based on factors like the size of their stock markets and whether or

not they import or export oil. The world development indicator (WDI) and the

OPEC bulletin or website served as sources for the data. The vector error correc-

tion model was used to analyse the collected data. Regarding the impact of oil

price fluctuations on the performance of the stock market, the findings of the

study were mixed. Oil price fluctuations have a positive impact on stock market

performance for countries that import oil. For oil- trading countries, the impacts

were found to differ across examined countries. Oil price fluctuations had a mixed

effect on both large and small stock markets. This demonstrates how crucial it is

to investigate changes in the price of oil and how they might impact stock market

performance, particularly in African countries.

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OKPEZUNE et al.

Based on the reasons behind real changes in oil prices, oil price shocks are divided into three classes (Hamilton,2009a).

The market can experience supply and oil- specific demand. When there is a disruption in global oil production, it is re-

ferred to as an ‘oil shock’. An increase in overall oil demand is called an ‘oil price shock’ (Kilian & Park,2009). When the

increased demand for oil is specifically related to the potential for limited future supply, it is called a ‘demand- specific

oil shock’.

To understand how the cost of oil impacts returns on the stock market, several theories have been proposed. According

to one view, the basics of macroeconomics can affect anticipated discounted future cash flows, which has an impact on

the reasonable worth of stocks. Oil price volatility is one such factor that influences the projected discounted cash flows

represented in asset values. High oil prices lead to increased production costs, lower corporate profits and a major dip

in stock value. The fluctuations in oil prices can have a monumental effect on financial markets (Jones & Kaul,1996).

Though it may be thought that rising oil costs would benefit upstream oil companies due to the close link between their

cost of production and the price of oil, overall it is anticipated that rising prices in oil would improve stock performance

for oil and gas firms while detrimentally affecting other businesses.

Furthermore, some studies indicate that rising energy costs cause companies to be unsure, resulting in delayed invest-

ment decisions and lower stock prices (Degiannakis et al.,2014). Despite this, various aspects of the financial markets

can limit the influence of variations in oil costs. Employment levels, industrial metal costs, rates of interest, and techno-

logical advancements can all in some way balance out any rises in energy prices. Another hypothesis is that businesses

are becoming more adept at forecasting price increases in variables and future market trends. It is an underestimate to

suggest that oil price fluctuations can affect some people.

For active investors in the global oil markets, the African stock market has been promoted as a place to diversify their

money (Gourène & Mendy,2018). This is a result of African countries' desire to enhance the inflows of foreign cash.

African governments have put into practice various policies and financial sector reforms to accomplish this and profit

from the advantages of a well- developed stock market (Calderón & Kubota,2009).

Countries in Africa like Algeria, Nigeria and Angola have played important roles in world oil production. However,

the continent remains low in world oil consumption. Despite this, the fluctuation in global oil markets has frequently

impacted the return on the African stock market. For instance, before the 2008 drop in the price of oil, the African stock

market experienced its best performance between the years 2000 and 2007 (Seck,2017). Given this reality, African poli-

cymakers must comprehend interactions between market returns and oil prices.

According to Li and Lu(2011), there is a great deal of ambiguity regarding the connection that exists between

changes in stock market outcomes and those of oil prices. The return on the global stock market was erratic from

2000 to 2004, but the price of crude oil remained relatively constant. On the contrary, there was a negative cor-

relation between the price of crude oil and the global stock market return between 2006 and 2008. The partner-

ship was successful from 2008 to 2011. This suggests that there is no clear connection. According to Mokni and

Youssef(2019), research on the link between the two factors has produced contradictory conclusions, much like

empirical findings.

Significant repercussions of the recent drop in oil prices may be seen in the stock markets in several African nations,

among other worldwide markets. This is because many African nations depend on the sale of oil to make money, and a

sharp decline in oil prices can seriously impede the development of these nations. As a result, it is critical to comprehend

how fluctuations in the price of oil might affect the performance of the stock market in African nations. To better under-

stand the impact of oil prices on their economies and which countries are suffering the most, this study will evaluate the

impact of oil price shocks on stock market performance in a chosen group of African nations. Policymakers may benefit

from knowing more about how to control the economic repercussions of oil price shocks and better plan for similar oc-

currences in the future according to the study's results.

This article provides a summary of empirical studies on the relationship between stock markets and oil prices.

Although numerous studies have examined how oil prices affect macroeconomic issues, few studies have examined how

oil prices affect stock market behaviour. This link has only been the subject of a few studies in Africa. The majority of

research in this area has focused on major marketplaces in developed countries. The segmentation of market returns into

large and small markets is one area where research is still lacking. The size of the stock market may affect how oil prices

affect stock market outcomes. It is possible that large markets built defences against the negative effects of crude oil price

volatility. This investigation aims to fill this knowledge gap.