Well, the big news that is dominating the Australian share market as investors return to work this Monday is the massive share market sell-off that we are currently seeing. ASX shares are in freefall this session, no other way to put it. The S&P/ASX 200 Index (ASX: XJO) is currently down a horrid 3.64%, its worst fall in years, and is back to just above 8,500 points.
That's after ending last week at 8,851 points. It's probably fair to say that the oil price is at least partially responsible for this dramatic plunge.
Investors woke up this morning to find that the price of Brent crude oil has exploded from around US$82 per barrel at the end of last week to well over US$108 per barrel at the time of writing. This is the first time oil has been above US$100 per barrel since the initial Russian invasion of Ukraine in 2022.
The impact of such a sharp rise in such a short space of time cannot be overstated.
For one, it points to structural issues in the oil market. That's not really a surprise, given that we know what is causing this price spike. As investors would no doubt be aware by now, the US-Iran War has resulted in the effective shuttering of the Strait of Hormuz, a critical chokepoint that usually hosts about 20% of the world's oil traffic.
Further, there have been numerous attacks on oil refineries and other infrastructure assets in the Gulf region of the Middle East since the outbreak of the war. We can only guess how long this new reality will last.
This combination has sent oil markets into a tailspin and has resulted in the momentous price hike we see today.
Image source: Getty Images
How do higher oil prices damage ASX shares?
But let's talk about the impact that US$100 oil has on ASX shares.
As we mentioned above, the share market is diving today. Almost every sector is seeing strong selling, with the notable exception of energy stocks.
So why does a shift in oil prices seemingly damage the valuations of everything from Qantas Airways Ltd (ASX: QAN) to Commonwealth Bank of Australia (ASX: CBA) and Woolworths Group Ltd (ASX: WOW)?
Well, it's because oil is a fundamental cost for many ASX-listed businesses. It simply flows into everything.
For Qantas, it is one of the airline's highest fixed costs. Aeroplanes need jet fuel, and that just got a whole lot more expensive. Hence Qantas' nasty 5%-plus nosedive this Monday.
For Woolworths, the costs of shipping groceries from suppliers to warehouses, and then on to supermarkets, just went up too. The company will either have to absorb these higher costs or pass them on to customers. That's two rather unpalatable options for shareholders to think about.
Even companies that don't directly use oil to provide goods and services cannot escape the influence of black gold, though. Commonwealth Bank, for example, is not a major oil user. However, its fortunes are highly correlated with the health of the broader economy.
If oil prices stay at their new levels, it will damage economic growth and increase inflation. After all, every extra dollar we have to spend on oil, petrol, or diesel is a dollar we can't spend on something else. And that's bad news for CBA and almost every company on the ASX that isn't an energy stock.
So, US$100 oil is bad news for most ASX shares and, by extension, most Australians. As such, it's perhaps no wonder the ASX is taking such a dramatic dive today. Let's see what the rest of the week has in store for investors.
