Why rising oil prices are bad news for the stock market

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Simran Kaur founded the Girls That Invest podcast with Sonya Gupthan.

OPINION: News seems to be everywhere that oil is on the rise and prices have skyrocketed, with premium 98 gas almost at $3.50/litre or 91 at $3/litre.

Oil is at its highest price in 13 years and this week the United States officially banned imports of crude oil from Russia, pushing the oil crisis and keeping the stock market on the brink. But why? What is causing this great hysteria around the world and what does it mean for investors in New Zealand?

Why Oil Is Rising

The war in Ukraine has had a significant impact on oil prices. The United States and its Western allies imposed crippling sanctions on Russia in an effort to curb the invasion of Ukraine.

READ MORE:
* What does a US ban on Russian oil accomplish?
* Western threat of Russian oil ban shakes markets
* Stocks fall as war overshadows ‘fantastic’ US jobs data

Major energy companies like BP, Shell and Exxon have all pulled out of energy deals with Russia. In the United States, Russia accounted for 8% of all crude oil imports. With fewer suppliers to supply oil, crude oil prices rose daily.

Simply put, if we cut off the supply of a product but the demand remains the same (or in this case the demand is slightly higher with the need for oil during the war), the cost of the item will increase.

What is causing oil prices to rise around the world and what does it mean for investors in New Zealand?

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What is causing oil prices to rise around the world and what does it mean for investors in New Zealand?

Effect on the stock market

When it comes to the relationship between oil and the stock market, it may seem quite confusing at first. How do oil prices drive stock prices down, especially outside of companies like British Petroleum?

When oil prices increase, inflation increases and the cost of producing goods for businesses increases.

Oil prices also directly affect the prices of goods made with petroleum products. This does not only mean that the price of Vaseline is more expensive to manufacture.

Petroleum is found in a number of everyday products that you may not know about, such as tires and refrigerators, but also life jackets and even anesthetics (what doctors use to put you to sleep). It now costs them more to produce the same product. The tires that a car manufacturer uses to make its cars now cost more. Companies either have to accept that these price hikes eat away at their profits or raise the price of the cars themselves, which will attract fewer consumers.

Indirectly, the rising cost of oil also affects how much a business needs to budget for transporting, manufacturing, and heating its products. Sectors that involve physical products are hit harder in this space than technology companies. You don’t need to physically ship your Microsoft 360 software, but you do need a lot of money to ship cars now.

So what do I do?

Declining sales or declining profits put companies’ performance at risk and as a result investors are less likely to buy into that company, or worse, withdraw their investments when they see below-average returns .

This does not mean that you have to withdraw your stocks during a period like this. Oil prices continue to fluctuate and the relationship with the stock market is not the only factor that can affect your stock prices. Other micro and macro factors like interest rates, geopolitical events and general investor sentiment will also play an important role.

Instead, it’s often wiser to let the market play and stick to your solid investment strategy. Long-term investors aren’t too concerned about short-term volatility.

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