Despite oil prices taking a breather on Friday, Brent crude is sitting just shy of $80 per barrel for a sixth straight week of gains. The late surge in crude oil prices has sent ripples through the world economies. Due to the very reason that oil is one of the most important pillars of the global economy, it directly affects the lives of individuals. The effect of oil is not in one direction though, and untangling all the effects is not easy. The rising oil also has a bearing on stock markets. The stock markets are however not generally affected by any one factor alone, oil is definitely one of them.
Effect on companies
All companies have to account for oil in one way or another. The higher price of crude and its derivatives may affect profit margins of many companies. The profit margins are impacted due to high oil prices as companies across sectors such as refining, airline, paints, tyres, footwear, lubricants, cement, logistics, construction materials and chemicals for whom crude or its derivatives are major input costs. Hence, the ability of companies to sustain profitability will depend on their capacity to take viable price hikes.
Furthermore, fuel and transportation costs are bound to increase across industries with rising fuel prices. When earnings season arrives, growth for these companies could be slower, possibly driving down stock prices. However, not all companies see rising oil prices affecting their profit margins. The oil marketing companies lock in supply contracts for that price when prices climb. The cost of production might be very low, and this keeps profits elevated even after the spot price plunges. These companies earn good profits.
The rising oil prices have an inflationary effect over the long term and eventually, it creates ripple effects on the economy. The common men feel the pinch in the daily lives, as wages will have to compensate for this rise in inflation. Higher wages can cause inflation because it increases the cost of goods and services thus increasing inflation.