How Can Oil Price Fluctuations Affect an Investing Portfolio?

Fluctuations in crude oil prices can have a meaningful impact on broad economic activity, and also on how an investment portfolio evolves over time. Now is the time when traders need to adjust their strategy and make sure to trim or increase exposure on certain companies, so they are able to meet expectations at the end of the day.

Several days ago, US crude oil spiked to a 13-year high of $130, for the first time since the beginning of the financial crisis. These valuations spill over into the prices of goods and services people consume, which might have a significant impact on margins.

Tech stocks

Technology-based companies are the most severely hit, as of now. Surging oil prices support higher inflation, which in turn prompts investors to get out of “growth-oriented names”. According to analysts at XPro Markets, an emerging online brokerage brand serving a global audience, popular CFDs like Tesla, Facebook, Netflix, and Zoom, have had impressive returns since the beginning of the COVID-19 pandemic.

Higher inflation means the potential for interest rates increases. As long as crude oil prices remain elevated, the potential for a rebound in tech remains subdued. It would be wise, given such circumstances, to reduce exposure to tech, or at least conduct intensive research, in order to find names that could outperform in this environment.

Consumer Discretionary

People buy products they need or want. The first category is usually referred to as “staples”, while the second one is “consumer discretionary”. As oil is expensive, utilities and food become top priorities for the wider public, leaving less disposable income for other goods/services that are more luxurious.

Nike and Adidas have been pressured since 2022 started and there is little hope for a strong recovery as long as basic needs remain expensive. Consumer discretionary is, thus,  another side of a portfolio that could be impacted negatively by high oil prices.

Although companies that are part of this sector are widely available for trading, as brands like XProMarkets cover them, investing in the long run at this point might not mean entering at an optimal valuation. Short-term bounces could only be due to short covering, trapping buyers who believe that the bearish sentiment will end soon.

Energy

Incentivized by rising oil prices, investments have been pouring into the energy sector. This puts companies like Chevron and Exxon Mobil in a favorable position, especially now that Western countries have imposed sanctions on Russia, meaning the supply shrank dramatically.

Growing demand for energy puts brands operating in a good spot. Basically, high prices mean their inventories are like an asset that grows in value over time. However, a balanced approach should be kept here and a portfolio needs to be built with the same diversification mindset in place.

This is a highly unpredictable market and anything can happen. A continuation higher in the oil trend will not be good news, simply because it can lead to demand destruction.