Swings in the oil price, which are usually fuelled by geopolitical tensions, typically vibrate throughout global markets. The S&P/ASX 200 Index (ASX: XJO) is no exception, especially given its heavy weighting to mining and energy shares.
Oil, or "black gold" as it is often called, is an essential component to just about everything, from energy to plastics to the food we eat every day.
But how does this impact investors, and what should you expect going forward with the latest price swings? Let's dive in and see.
Do oil price changes take time to affect Australia?
Oil price shifts don't immediately hit Australian petrol stations. The crude oil has to be transported to refineries, processed, and then shipped domestically. This is a process that stretches over several weeks.
So, despite headlines about surging oil prices, retail fuel prices will lag behind.
Brent crude oil, of which about 90% of the world's oil is priced on, currently trades at US$67.80 per barrel at the time of writing. This is after hitting a high of US$76 earlier this week.
In May, it bottomed at US$62 per barrel.
According to the Australian Broadcasting Corporation (ABC)'s Michael Janda, we "shouldn't really" be seeing the changes of the recent spikes in oil in the petrol bowser any time soon.
That said, when people are reading headlines about surging oil prices, it does seem like an opportune time for fuel retailers to jack up their prices.
That's exactly what Treasurer Jim Chalmers yesterday warned them against doing.
He's tasked the Australian Competition and Consumer Commission (ACCC) to keep a close watch on petrol and diesel pricing, ensuring fairness for consumers.
What's driving the recent oil price volatility?
Now's probably a good time to brush over what's behind the recent volatility in oil prices.
As my colleague Bronwyn recently covered, tensions between Iran and Israel, along with the US' involvement in the conflict, have caused a stir in global oil markets.
Part of this involves the potential closure of the Straight of Hormuz, a key route for oil tankers to ship the liquid gold around the globe. This particular route accounts for around 20% of global supply.
RBC Capital Markets' Helima Croft provided some additional insight into the currently volatile oil markets.
As reported by the ABC, Helima notes that despite recent US military strikes on Iranian nuclear facilities, Iran's ability to retaliate is uncertain.
….President Trump essentially built…a Sun Tzu 'golden bridge' by foregoing a regime change agenda and subsequently signaling an end to maximum pressure sanctions on oil exports to China
This strategic threat has been a significant factor in the recent spike in oil prices and the rally in energy stocks on the ASX.
The ASX 200 energy sector jumped in the first week of conflict and climbed further last week as markets priced in the risks of disrupted global oil supplies.
Energy shares remain sensitive to geopolitical developments, so expect volatility as the situation unfolds.
As for this week, the S&P/ASX 200 Energy Index (ASX: XEJ), which tracks the performance of the major energy players on the ASX, is down nearly 5% at the time of writing.
What does this mean for your portfolio?
Oil price shocks are never just about petrol prices. As I mentioned before, they ripple through the entire economy and markets, especially sectors tied to energy.
So far, ASX 200 energy shares have ridden this wave, both up and down. But investors should be mindful of lag times, geopolitical uncertainties, and the broader economic impacts these times can bring.
That said, rising oil prices often benefit energy stocks but can weigh on other sectors and the broader economy. Energy costs are, after all, an essential component of business expenses.
This backdrop explains why oil prices and ASX 200 energy shares have been on a rollercoaster lately, reflecting global supply fears and geopolitical risk premiums.
