Why Many Investors Are Concerned About Rising Oil Prices
Lots of stock market investors are watching the current situation in the middle east very closely. This may well be for selfish reasons because the escalating troubles could result in share price falls across the board, which will obviously hurt their own portfolio. However the rising oil price is another real concern.
As I write this article the price of crude oil is now comfortably above the $100 level and seems to be rising virtually every day due to the ongoing troubles in Libya. The worry is that these troubles will escalate and continue to spread from country to country creating a big global conflict.
If this happens, then the stock markets will fall heavily all around the world. We will also see oil prices soar even higher. Most books and courses do not talk about the effect that oil prices can have on stock markets, but they should do because when they continue rising, you often get some significant falls.
The problem is that when the wider market falls, even the best stocks will fall as well. So if you think your stocks are immune from the consequences of a high oil price, then you may be in for a surprise.
You should also consider the fact that many companies are highly reliant on a stable oil price. These include the obvious candidates such as travel companies and airlines, but also those companies who have significant delivery and distribution costs. These could include retailers and manufacturing companies.
So the point is that your portfolio could well suffer from a rise in the price of oil. However you can protect yourself to some extent. You can buy shares in oil companies, for example, or you can take a long position on the price of crude oil.
Another popular option is to purchase an ETF that closely follows the underlying crude oil price. If the troubles continue and it continues heading higher, then you may suffer some losses in the short term, but at least you will make some of this money back through your ETF investment.
The point I want to get across is that high oil prices are a real problem for stock market investors. Unless you are heavily invested in oil stocks, you have good reason to think about what effect these troubles will have on your portfolio. No-one really knows what is going to happen. The oil price may well fall if the situation in Libya quickly changes. However the good news is that you always have the option to hedge yourself in some way if you do have genuine concerns.
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