Investors might be breathing a sigh of relief in these early hours of Tuesday's trading day. After recording yet another red day yesterday, the S&P/ASX 200 Index (ASX: XJO) seems to have turned a corner so far this Tuesday. At present, the index has opened with a healthy rise of 0.53%, raising the ASX 200 back over 6,000 points. But let's talk about the oil price.
As most investors would be painfully aware, the ASX 200 has been a bit of a horror show over the past month or two. Since mid-September, the index has fallen by a sobering 6.4%, and by 9.9% since its February 52-week high. As of yesterday, that put the ASX 200 in official correction territory.
A large part of the ASX 200's most recent falls can probably be attributed to the tragic war that is currently going on in the Middle East. Some of the economic and investing concerns have revolved around oil prices, and what they could mean for ASX shares.
So today, let's talk about why oil is so important to the Australian share market, and what a big spike in the price of 'black gold' could mean for the ASX.
Anyone who owns a petrol or diesel-powered vehicle already has quite an intimate relationship with the global oil price. But how does oil relate to the share market?
Image source: Getty Images
Why does 'black gold' affect the ASX 200?
Well, oil represents far more than car fuel. It is still an essential ingredient in almost any form of productive activity in the economy. Every time you go shopping, whether that's at Woolworths Group Ltd (ASX: WOW), Harvey Norman Holdings Limited (ASX: HVN) or Wesfarmers Ltd (ASX: WES)'s Bunnings, the goods you buy will have probably arrived in store using oil-powered transport. It's a similar story if you have your shopping delivered to your door.
There's the jet fuel or ship diesel that facilitated its arrival in Australia in the first place. Then it's the diesel that powered the trains and/or trucks that got those goods from the port to the store.
But it goes further than that. The roads that you drove on to get to the shops were likely made from tar, a crude oil derivative. And if what you bought contains any plastic, that comes from oil as well.
Put simply, oil percolates through the entire economy. And despite our need to wean ourselves off of the stuff for the sake of the climate, oil is still playing this essential role in our economic system today.
Oil prices and the Australian stock market
So now you might understand why the price of oil itself is so influential to the ASX stock market. When oil prices rise, Woolies, Bunnings and Harvey Norman's transport bills go up, meaning that prices are likely to follow. At the same time, motorists are being squeezed at the bowser, which reduces their disposable income available to spend at those shops.
Sure, high oil prices benefit ASX energy and oil shares that extract the black gold out of the ground. The biggest winners are usually the likes of Woodside Energy Group Ltd (ASX: WDS), Beach Energy Ltd (ASX: BPT) and Karoon Energy Ltd (ASX: KAR). But for almost everyone else, they are bad news.
Thanks to the war in the Middle East, global oil prices have been on a rollercoaster over October thus far. According to Business Insider, West Texas Intermediate WTI) crude was going for just under US$83 a barrel on 12 October. By 19 October, those same barrels were selling for US$89.40.
As such, perhaps it's not a coincidence that the ASX 200 fell by more than 2% during that period. Or that today's stock market rally coincides with a big oil price fall overnight, as we documented this morning.
Oil bleeds into everything on the ASX. So next time you hear investors discussing the oil price with either excitement or trepidation, you know why.
