🔍
How Do Crude Oil Prices Impact the Stock Market and the Economy? - YouTube
Channel: TD Ameritrade
[0]
When oil prices soar, you may feel it at the
pump, but that’s just one part of the story.
[5]
Despite moves toward renewable forms of energy,
oil still plays a major role in the world
[10]
economy, so its price is one of many pillars
in the financial markets.
[14]
Let’s take a closer look at why the price
of oil matters and how it can impact your
[19]
portfolio.
[20]
First, what exactly are we referring to when
we talk about the price of oil?
[26]
The price of oil is tracked per barrel and
is based on two major benchmarks: Brent and
[31]
West Texas Intermediate, or WTI.
[33]
There are other benchmarks from around the
world, like the Dubai, but the Brent and WTI
[39]
affect the United States the most.
[42]
These benchmarks give investors a picture
of the price of oil worldwide.
[46]
So, how are these benchmark prices set?
[49]
Unsurprisingly, it has a lot to do with supply
and demand.
[53]
For example, when the coronavirus pandemic
hit in early 2020, oil prices plummeted as
[59]
economies shut down and demand for oil dried
up almost overnight.
[64]
But as the world economy began to reopen in
late 2020 and 2021, demand ramped back up
[70]
as travel and consumption resumed.
[73]
Coal and natural gas shortages at the same
time increased the demand.
[77]
But supply was not able to keep pace, sending
oil prices skyrocketing.
[83]
This was partially due to decreased production
capacity resulting from a decade of falling
[87]
oil prices and investments before the pandemic
hit.
[91]
But the 2021 situation also highlighted the
role politics can play in oil prices.
[97]
One of the major players in oil production
is the Organization of the Petroleum Exporting
[102]
Countries, or OPEC.
[103]
It’s an intergovernmental organization of
countries that coordinate and unify petroleum
[109]
policies to keep prices favorable for them.
[112]
In late 2021, OPEC planned to only modestly
increase output, keeping supply low even as
[118]
demand surged, leading prices to spike.
[122]
So how can the price of oil impact the economy?
[125]
It’s important to point out that with oil
prices and the economy, there’s a bit of
[129]
chicken and the egg situation.
[132]
Economic activity affects supply and demand
for oil, which affects oil prices, which can
[136]
in turn affect economic activity.
[139]
The relationship is circular, and the starting
point isn’t always clear.
[144]
Crude oil, that is, oil that’s drilled from
the ground to make things like kerosene, gasoline,
[149]
and asphalt, is especially important because
it’s used to extract lots of other raw materials
[155]
to produce and transport goods.
[157]
When oil gets more expensive, so does basically
everything else.
[161]
This can lead to inflation, which can hurt
economic growth.
[165]
For example, in the ‘70s, economic growth
stalled, due in part to political crises that
[170]
caused oil prices and inflation to soar.
[174]
That’s why people tend to think low oil
prices are good for the U.S. economy; however,
[179]
high oil prices aren’t always devastating.
[183]
Consider this: One of the best recent years
for the U.S. stock market was 2013, when the
[188]
economy really started to recover from the
Great Recession of 2008.
[193]
Through much of 2013, the price of crude was
above $100 per barrel, and gas cost more than
[199]
$3 per gallon across much of the country.
[202]
High crude prices didn’t make the wheels
fall off then, so high crude prices alone
[206]
isn’t necessarily a speed bump to a growing
economy.
[210]
So how does this translate to the stock market?
[212]
There’s evidence that oil prices and the
stock market can move in the same direction.
[217]
Sometimes they’re both reacting to a common
factor.
[220]
For example, during the coronavirus pandemic,
economic activity dropped and so did demand
[225]
for oil.
[226]
However, if oil prices rise enough to cause
inflation that hurts economic growth, it could
[232]
cause issues for the overall stock market
as well.
[235]
In periods of extremely high oil prices, so
high that it affects the fundamentals of individual
[241]
companies, there’s the possibility that
valuations may begin to look less attractive
[245]
and stock performance can potentially decouple
from oil price performance.
[250]
There are a few areas of the stock market
where oil prices can have a particularly big
[254]
impact.
[255]
The most obvious is the Energy sector.
[258]
The S&P Energy sector’s two largest components
are Exxon and Chevron, which are fossil fuel
[264]
companies, meaning where they go, often times,
the sector goes as well.
[268]
It’s not a surprise then that the sector
tends to perform better when oil prices are
[273]
high, though renewable energy companies are
seeing continued growth, opportunity, and
[278]
better cost dynamics.
[280]
Companies that deal directly with moving goods
or people like airlines and parcel delivery
[285]
services are also directly affected by oil
prices.
[289]
Higher fuel prices can eat into their profits
or eventually lead them to pass those increased
[294]
prices on to their customers.
[296]
Most of the big Consumer Discretionary sector
companies like Target or Amazon benefit by
[301]
sourcing products in places like China where
labor is cheaper and then shipping those finished
[306]
goods to the United States, Canada, and Europe.
[310]
The cost of shipping isn’t typically a huge
determinant of companies’ operating margins,
[315]
but expenses can certainly leave a dent when
crude stays high, eventually figuring into
[319]
bottom-line growth.
[321]
Or again the companies could pass along higher
prices to customers, fueling inflation.
[326]
Due to climate change, oil faces an uncertain
future.
[330]
Many car companies are going electric, and
there’s increasing interest in Environmental,
[335]
Social, and Governance, or ESG, shifting investment
of time and capital to renewable energy.
[341]
A possible outcome is the global economy slowly
transitioning away from oil.
[346]
The question is how oil producing companies
might shift their approach to meet a changing
[351]
market.
[352]
In the meantime, the price of oil can have
a big impact on the economy and markets, and
[357]
it's an important indicator to consider when
making decisions about your portfolio.
[362]
Just remember, historically speaking, high
or low oil prices don’t absolutely spell
[368]
doom or success for the markets.
Most Recent Videos:
You can go back to the homepage right here: Homepage