The oil price has reached an 8-year high. What could this mean for ASX shares?
Oil prices have risen above US$100 and have hit a price that hasn't been seen for almost a decade.
It has been a very volatile day for the ASX share market. The S&P/ASX 200 Index (ASX: XJO) fell by 3% today to 6,991 points.
What's happening?
Russia has started a full-scale invasion of Ukraine, as reported by various media and Ukrainian officials.
Before today, geopolitical concerns had sent the oil price higher. It's possible that there could be major economic sanctions against Russia, which was the second biggest oil producer in 2020 according to reporting by Forbes.
Sanctions on Russian oil could hurt the available global oil supply, when prices were already rising.
According to reporting by Forbes, Russia produced 10.1 million barrels of oil per day of crude oil and natural gas condensate in 2020.
How could the higher oil price affect ASX shares?
There are a few key oil producers on the ASX. Two of the biggest are Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL).
Another major ASX-listed oil producer is BHP Group Ltd (ASX: BHP), though it's planning to divest its oil business to Woodside in the next few months.
However, there are a number of wider impacts that higher oil prices could have.
There are plenty of ASX shares where they use a lot of oil products in their main operations, or the supply chain does, like Qantas Airways Limited (ASX: QAN), Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL).
There are plenty of other ASX shares that use oil in some way.
In a bid to try to control oil prices, Australia is considering using its 1.7 million barrels of fuel reserves held in the United States as part of a joint effort with like-minded nations according to reporting by the Australian Financial Review.
The newspaper said that Energy Minister Angus Taylor said Australia was working with the US and the International Energy Agency "to monitor global energy markets, ensure ongoing supplies and plan for appropriate measures to ensure energy security." Mr Taylor continued:
Australia is prepared to join other IEA member countries to contribute to a global collective action, if one is called, through using our oil stocks held in the United States' Strategic Petroleum Reserve (SPR) and will continue to monitor global gas markets.
Inflation concerns
Inflation was already a big concern for ASX shares, economists and central bankers before this difficult situation, as well as the climbing oil price.
The Guardian quoted Melbourne-based Kyle Rodda from IG Markets that said that the increase in fuel prices could lead to further inflation, making central banks have to react strongly to inflation:
… the supply disruptions in commodity prices would drive costs higher, and exacerbate the inflation central banks are already struggling to contain.
That means despite, this the Fed – and others – would be unable to buffet the shock, and would potentially have to tighten policy – a very negative scenario for risk assets.
Rising interest rates can have a downward impact on asset prices like ASX shares.
Warren Buffett said at the 1994 Berkshire Hathaway annual general meeting:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature … its intrinsic valuation is 100% sensitive to interest rates.
