Crude oil price rise can affect the Stock Exchange, whether it makes the market strong or weak?
Read on to find out…
Crude oil is the raw product which is used to prepare many products related to the energy sector, for example, gasoline, petrol, diesel, home heating oil natural gas, electricity production etc. It is one of the most important commodity in terms of price and geopolitical views. It is because of the critical region in which crude oil is extracted.
Crude oil is traded in the market in the name of oil future contracts which is an agreement to buy or sell oil at a specific date in the future for an agreed price on the floor of the commodity exchange. Traders or investors who are registered with commodities future trading commission can trade for crude oil price.
Crude oil price is the spot price of various barrels of oil West Taxes Intermediate or Brent Oil. Crude oil price is affected by many factors as it is a global commodity and it is used by every sector of the economy in either directly or indirectly way.
Price of crude oil is driven by mainly four factors, they are:
- Geopolitical and economic major events
- OPEC production
- Supply and Demand
- Natural Disaster
But, as oil is the basic good of the economy hence change in its price also affects other sectors such as the economy of the country, the stock market, gold prices, inflation etc.
Many investors and market experts believe that there is no big direct connection with the crude oil price movement yet some of them are able to design theory that proves that crude oil price can affect the other sector of the economy including common man.
This reduced consumer demand will affect the revenue of companies. As there will high expenditure but low revenue that will lead to falling in the stock price.
Hence we can say that consumer demand can affect the stock price movement. Negative earning of the company also affect the market sentiment toward the company.
Profit Margin Reduction
As we talked earlier oil is the basic need as it gives the product as jet fuels, gasoline, heating oil, and big companies or industries use the oil for transportation of products, employee travel expenses for work purpose.
If the crude oil price will rise then the price of all its product will increase. Then company expenses will increase or loss will deepen, which will lead to a reduction in profit margin. Less profit margin means the company is not performing well or making less money in its per dollar sales.
Also, the company can not increase the price instantly as it will profit the competitors. Therefore the company has to suffer the loss for a few days. This reduction in profit margin also leads to a reduction in its share price.
Rise in Inflation
If crude oil price rises it affects most of the goods and service, some are affected directly if they are the direct product of crude oil. Some are affected indirectly as I said before. This leads to an increase in the price of other products and services.
The increase in the price of goods and services is called inflation. The inflation is good for the economy if it is controlled by the central financial regulatory body.
an uncontrolled rise in inflation affects the economy negatively. A normal person will think that inflation will increase the stock price but remember with inflation market price of that asset increases which can affect the demand of assets. Rising cost puts the downward pressure on profit which hurts the SGX stock market. With extreme inflation, stocks tend to fall down not rise.
Profit Increment In Oil Company
You can say increased crude oil price is not all bad news.
The only sector which is affected positively with an increase in crude oil price is an oil company. As extraction of oil would not increase with the increase in crude oil price hence the production cost will remain the same and profit will increase. The spot price of oil is a function of supply and demand and investment rate. When price rises the companies lock the supply contract on that price which further aid to profit increment.
Most Singapore oils companies are the part of STI (Strait Time Index) therefore when the stock price of these companies rises the index STI value rises. This balances the fall in price due to other companies.
There are theories that change in crude oil price doesn’t affect the stock market. Crude oil price doesn’t drive the stock market but it does create some changes in the price movement. Being a potential Singapore trader you should be aware of the factors that can affect the SGX price movement.
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