Oil Prices Still Climbing – Here’s What It Means

May 21, 2018
1020 Views

U.S. stocks were up last week as oil prices surged around the world. America’s withdrawal from the Iran Nuclear Agreement didn’t have the widespread negative effects that some analysts predicted, however, rising oil prices won’t be good news forever. Eventually, the increases will trickle down to goods and the end consumer, and that could turn out to be damaging to some areas of the stock market and the economy.

 

Historical data shows that other indexes go up in price along with oil. Aluminum prices will rise, as will the price of steel. Combine this with the fact that wage inflation is expected in the coming year, and you are left with a situation where spending suddenly becomes tighter and the economic growth may start to stall or at least slow down. Long-term Treasury yields could also be impacted.

 

High Oil Prices: A Two-Sided Issue

 

High oil prices can be damaging to the economy. The high cost of crude oil and refined petroleum means fuel will be more expensive at the pump. Gas, logistics, and shipping will be more expensive, and the operating costs of general manufacturing will increase.

 

However, there may still be benefits. The energy sector can grow when oil prices are high, and this can create returns for shareholders who are well diversified. Job growth could be created in energy industries, which could help to balance out where the economy suffers in other areas.

 

It’s a balancing act and one that can’t be predicted with ease. Consumers are in a good position today, thanks to the tax cuts delivered by the Republican government. Some analysts believe that consumers won’t immediately feel fuel increases, because the change would come about gradually.

 

In the stock market, the most likely sectors to be hurt by increased fuel prices are:

 

  • Utilities
  • Financials
  • Materials
  • Health Care
  • Consumer Staples
  • Consumer Discretionary
  • Telecommunications services.

 

This is assuming that fuel prices rise by 30% over the next year. Crude oil indexes grew 3.96% in the last month, so it’s not an impossible scenario.

 

Should You Start Being Cautious With Your Stock?

 

With the markets still healthy, there’s no need to panic now. Take this as a warning that some sectors could start to decline if oil continues to rise, while Energy and Industrials will outperform the rest of the market. Information Technology stocks are likely to remain mostly unaffected by increased fuel prices.

 

As always, a healthy amount of diversification is key to protecting your portfolio, and it will be important to track both oil and general stock market index movement in the coming months.

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