Impact Of Rising Crude Oil Prices

Impact Of Rising Crude Oil Prices

𝐂𝐫𝐮𝐝𝐞 𝐨𝐢𝐥 𝐩𝐫𝐢𝐜𝐞𝐬 𝐡𝐚𝐯𝐞 𝐢𝐧𝐜𝐫𝐞𝐚𝐬𝐞𝐝 𝐬𝐡𝐚𝐫𝐩𝐥𝐲 last week, with Brent Crude, surged to $𝟭𝟭𝟮 𝗮 𝗯𝗮𝗿𝗿𝗲𝗹 yesterday. While markets are focusing more on the steep increase in oil prices, what concerns me is the tripling in 𝐢𝐦𝐩𝐥𝐢𝐞𝐝 𝐯𝐨𝐥𝐚𝐭𝐢𝐥𝐢𝐭𝐲 𝐢𝐧 𝐨𝐢𝐥 𝐩𝐫𝐢𝐜𝐞𝐬 that could impact not just oil stocks but the overall market.

The 𝐛𝐢𝐠𝐠𝐞𝐬𝐭 𝐛𝐞𝐧𝐞𝐟𝐢𝐜𝐢𝐚𝐫𝐢𝐞𝐬 𝐚𝐫𝐞 𝐨𝐢𝐥 𝐜𝐨𝐦𝐩𝐚𝐧𝐢𝐞𝐬, especially those that do production and drilling. Thus, ironically, 𝐑𝐮𝐬𝐬𝐢𝐚 𝐰𝐨𝐮𝐥𝐝 𝐛𝐞𝐧𝐞𝐟𝐢𝐭 𝐟𝐫𝐨𝐦 𝐭𝐡𝐞 𝐢𝐧𝐜𝐫𝐞𝐚𝐬𝐞 𝐢𝐧 𝐨𝐢𝐥 𝐩𝐫𝐢𝐜𝐞𝐬 because of its dependence on oil revenues, evident by the reluctance of the OPEC countries (led by Russia) to increase oil production.

The 𝐛𝐢𝐠𝐠𝐞𝐬𝐭 𝐥𝐨𝐬𝐞𝐫𝐬 𝐚𝐫𝐞 𝐭𝐡𝐞 𝐜𝐨𝐦𝐩𝐚𝐧𝐢𝐞𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐚𝐢𝐫𝐥𝐢𝐧𝐞 𝐚𝐧𝐝 𝐭𝐫𝐮𝐜𝐤𝐢𝐧𝐠 𝐬𝐞𝐜𝐭𝐨𝐫 as they have a high proportion of their inputs costs linked to oil prices.

However, in the longer term, if the oil prices continue to increase, the following will happen:

1)Consumers will spend more of their wallets on petrol/oil and will have 𝐥𝐞𝐬𝐬 𝐦𝐨𝐧𝐞𝐲 𝐭𝐨 𝐬𝐩𝐞𝐧𝐝 𝐨𝐧 𝐫𝐞𝐭𝐚𝐢𝐥, 𝐥𝐞𝐢𝐬𝐮𝐫𝐞, 𝐚𝐧𝐝 𝐨𝐭𝐡𝐞𝐫 𝐝𝐢𝐬𝐜𝐫𝐞𝐭𝐢𝐨𝐧𝐚𝐫𝐲 𝐢𝐭𝐞𝐦𝐬.

2)𝐇𝐢𝐠𝐡𝐞𝐫 𝐨𝐢𝐥 𝐩𝐫𝐢𝐜𝐞𝐬 𝐰𝐢𝐥𝐥 𝐟𝐮𝐫𝐭𝐡𝐞𝐫 𝐢𝐧𝐜𝐫𝐞𝐚𝐬𝐞 𝐢𝐧𝐟𝐥𝐚𝐭𝐢𝐨𝐧, 𝐚𝐧𝐝 𝐜𝐞𝐧𝐭𝐫𝐚𝐥 𝐛𝐚𝐧𝐤𝐬 𝐜𝐚𝐧 𝐡𝐢𝐤𝐞 𝐢𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐫𝐚𝐭𝐞𝐬 in the near term.

As far as Investors are concerned, they need to tweak their portfolio with the change in oil prices based on how they believe the prices will move in the future. There are three broader viewpoints:

1)𝐎𝐢𝐥 𝐩𝐫𝐢𝐜𝐞 𝐰𝐢𝐥𝐥 𝐝𝐫𝐨𝐩 – In that case, the effect on your portfolio is minimal, and there is no need to rebalance your portfolio.

2)𝐎𝐢𝐥 𝐩𝐫𝐢𝐜𝐞 𝐰𝐢𝐥𝐥 𝐜𝐨𝐧𝐭𝐢𝐧𝐮𝐞 𝐭𝐨 𝐢𝐧𝐜𝐫𝐞𝐚𝐬𝐞 – In that case, reduce/eliminate exposure to stocks primarily in transportation and airline sectors.

3)𝐈𝐭 𝐝𝐨𝐞𝐬 𝐧𝐨𝐭 𝐦𝐚𝐭𝐭𝐞𝐫 – Here, do not make any significant changes in your portfolio, but continue to reassess your investments to see if they continue to get overvalued/undervalued given the current oil prices.

I fall under the third category as my investments in stocks reflect the underlying firm’s value and, thus, are not designed on macro factors. Therefore, if i choose to sell any of my investments, their value has declined given the current shift in oil prices and not because i have a point of view on the future of oil prices.