How oil prices affect markets and investments

Oil prices are more than just a number at the pump – they’re a powerful signal that ripples across the market, affecting everything from inflation to company profits to the clean energy transition.

Last year, with Brent crude (a global benchmark for oil prices) moving between $60–$82 per barrel and prices fluctuating due to international events, it’s more important than ever for investors to understand the actions of OPEC+ (the Organisation of the Petroleum Exporting Countries and allies) and how oil affects the market.

Brent crude is sourced from the North Sea and serves as a key benchmark for crude oil prices in Europe and globally. Crude oil is one of the most actively traded commodities in the world, with prices influenced by trading activities across major markets, including the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE).

Global events—including trade tensions involving China, economic growth trajectories, and geopolitical shifts—play a significant role in shaping oil prices and market sentiment.

Why do crude oil prices change

Oil prices are determined by a complex interplay of factors that can cause dramatic swings in market value. Understanding these drivers helps investors anticipate how energy costs might affect their portfolios.

Supply and demand fundamentals

The basic economic principle of supply and demand primarily drives oil prices. As a critical component of the global economy, oil demand rises during periods of economic expansion as industries ramp up production, transportation increases, and consumer spending grows. Conversely, economic slowdowns reduce demand.

High prices typically result from:

• Strong global economic growth is increasing demand
• Supply restrictions from production cuts
• Geopolitical disruptions are limiting supply
• Strategic petroleum reserve drawdowns are being exhausted

Lower prices often indicate:

• Oversupply from increased production
• Weak economic growth is reducing demand
• Shifts in energy consumption patterns as part of the energy transition
• New production sources coming online (such as US shale oil)

Geopolitical volatility and OPEC+ influence

The OPEC+ alliance—consisting of the 13 OPEC member countries plus 10 allies, including Russia—often coordinates production levels to influence global oil prices. However, geopolitical events can rapidly override these carefully managed strategies.

Recent examples of geopolitical impact:

• Israel-Iran conflict (2024): Oil prices surged to nearly $79 per barrel in June 2024 due to escalating tensions and fears of supply disruptions in the Middle East, which produces approximately 30% of global oil. Prices quickly fell back to around $67 after a ceasefire was announced.
• Russia-Ukraine war (2022): When Russia invaded Ukraine in February 2022, oil prices spiked dramatically as Russian oil and gas (a substitute energy source for oil in some applications) faced sanctions and were partially removed from Western markets. This supply shock pushed Brent crude above $120 per barrel at its peak.
• Libyan instability: Libya, still struggling to stabilise its oil industry after years of conflict following Gaddafi’s fall in 2011, continues to contribute to supply uncertainties. The country’s production can swing by hundreds of thousands of barrels per day depending on internal political dynamics.

Supply pressures and seasonal demand patterns

Despite periods of weak global demand and rising inventories, several factors continue to support oil prices:

• OPEC+ production management: The alliance has implemented voluntary production cuts of over 2 million barrels per day to prevent oversupply
• Seasonal demand fluctuations: Summer driving seasons in North America and Europe typically increase demand, while winter heating oil needs affect markets differently
• Hurricane risks: The US Gulf Coast, which produces roughly 15% of US crude oil, faces seasonal hurricane threats that can disrupt production and refining
• Clean energy competition: The increasing cost-competitiveness of renewable energy sources and electric vehicles is gradually affecting long-term projections of oil demand.
• Economic conditions: Recessions, trade wars, and currency fluctuations all influence both supply and demand dynamics.

Market tracking and price benchmarks

Oil prices are tracked using real-time market data, allowing analysts and investors to monitor daily price movements, including intraday highs and lows, previous day comparisons, and trading volumes. Over the past year, oil prices have fluctuated significantly, making year-on-year trends crucial for understanding market direction and informing investment decisions.

Key oil price benchmarks:

• Brent Crude: Global benchmark, North Sea sourced
• West Texas Intermediate (WTI): US benchmark, generally trades $2-5 below Brent
• Dubai/Oman: Middle East benchmark for Asian markets

For real-time oil price data and charts, visit:

• Bloomberg Energy: https://www.bloomberg.com/energy
• CNBC Commodities: https://www.cnbc.com/commodities
• Trading Economics: https://tradingeconomics.com/commodity/crude-oil

Why oil prices matter to markets and economies

Oil price movements create cascading effects throughout the global economy. Understanding these transmission mechanisms helps investors anticipate broader market reactions.

Impact on inflation

When oil prices rise, the cost of transportation and manufacturing increases across virtually every sector of the economy. These higher input costs are typically passed on to consumers through higher prices for goods and services, contributing to overall inflation.

The inflation transmission mechanism:

1. Direct effects: Higher gasoline and heating oil prices immediately impact consumer spending
2. Transportation costs: Shipping costs rise, affecting everything from food to furniture prices
3. Manufacturing inputs: Petrochemicals used in plastics, fertilisers, and industrial processes become more expensive
4. Secondary effects: Workers demand higher wages to offset higher living costs, potentially creating a wage-price spiral

Conversely, falling oil prices can provide disinflationary relief, reducing costs throughout the supply chain and easing pressure on household budgets.

The relationship between oil and inflation is particularly important because central banks monitor core inflation measures that often exclude volatile energy prices. However, if oil price changes persist, they eventually feed into core inflation through these secondary channels.

Influence on interest rates and monetary policy

Central banks, particularly the Federal Reserve and the European Central Bank, monitor oil-driven inflation closely when setting interest rate policy.

How oil affects monetary policy:

• Rising oil prices: Persistent price increases may prompt central banks to raise interest rates to contain inflation or keep rates higher for longer. Higher interest rates generally have adverse effects on:
  • Bond yields (which rise, causing bond prices to fall)
  • Stock valuations (as discount rates increase and borrowing costs rise)
  • Currency markets (stronger currency in rate-hiking countries)
  • Real estate and other rate-sensitive assets

• Falling oil prices: Declining energy costs ease inflationary pressure, potentially allowing central banks to maintain accommodative monetary policy or cut rates sooner. This environment could support:
  • Stock market performance
  • Riskier corporate bonds and high-yield debt
  • Economic growth through lower input costs
  • Weaker currency (in countries cutting rates)

For current monetary policy updates:

• Federal Reserve: https://www.federalreserve.gov
• European Central Bank: https://www.ecb.europa.eu

Effects on investment markets and sectors

Oil price volatility creates uncertainty, and financial markets generally dislike uncertainty. However, different sectors and asset classes react differently to oil price movements.

Winners from higher oil prices:

• Energy sector stocks: Oil and gas exploration companies, refiners, and service providers typically see profit margins expand significantly when crude prices rise
• Energy-exporting nations: Countries like Saudi Arabia, Russia, Norway, and Canada benefit from improved trade balances and stronger currencies
• Alternative energy infrastructure: Higher oil prices make renewable energy and electric vehicles more economically competitive, potentially accelerating investment in clean energy companies
• Commodity-linked investments: Energy-focused ETFs and commodity funds gain value

Losers from higher oil prices:

• Airlines and transportation: These fuel-intensive industries see profit margins squeezed significantly. Budget airlines are particularly vulnerable
• Manufacturing and industrials: Companies with energy-intensive production processes face higher input costs
• Consumer discretionary sectors: Shopping, dining, leisure, and travel all tend to suffer as consumers have less disposable income after paying for more expensive fuel and heating
• Emerging markets: Many developing economies are net oil importers and face trade balance pressures and currency weakness when oil prices rise
• Automotive manufacturers: Traditional car sales may decline as consumers face higher fuel costs

Complex relationships:

• Chemical companies: May benefit from stable oil prices (as many use crude derivatives as inputs), but suffer from extreme volatility
• Utilities: Natural gas prices often move with oil, affecting power generation costs
• Agriculture: Fertiliser costs rise with oil prices, but biofuel demand may increase

Currency market implications

Oil is predominantly priced in US dollars globally, creating important currency dynamics:

• US dollar strength: Rising oil prices can strengthen the dollar as international buyers need more dollars to purchase oil
• Oil-exporting currencies: Canadian dollar, Norwegian krone, and Russian ruble often strengthen with higher oil prices
• Oil-importing currencies: Japanese yen, Indian rupee, and Turkish lira may weaken as import bills increase

Managing oil price risk in your investment portfolio

Oil prices are a significant force in markets—influencing inflation, affecting central bank decisions, and creating waves across sectors. In a world with fragile supply chains, ongoing geopolitical conflicts, and rapid energy transition, oil remains a key player in global economic dynamics.

The case for diversification

The good news for investors is that a well-diversified portfolio naturally helps manage oil price risk. By investing in a range of asset types spread across different industries, geographies, and company sizes, you reduce exposure to any single commodity’s price swings.

Diversification benefits include:

• Sector balance: Owning both energy producers (who benefit from high prices) and energy consumers (who benefit from low prices) creates natural hedges
• Geographic spread: Including both oil-exporting and oil-importing economies in your portfolio
• Asset class mix: Bonds, stocks, and alternative investments react differently to oil shocks
• Active rebalancing: Periodically adjusting portfolio weights ensures no single position becomes too dominant

Why you don’t need to time oil prices

While we might notice fuel prices changing at the local petrol station, trying to adjust your long-term investment strategy based on short-term oil price predictions is generally counterproductive. Here’s why:

• Unpredictability: Even professional commodity traders struggle to predict oil price movements consistently
• Transaction costs: Frequent trading based on commodity forecasts incurs costs that erode returns
• Long-term trends: Over decades, well-diversified equity portfolios have grown despite oil price volatility
• Systematic approach: Maintaining a disciplined investment strategy through market cycles typically outperforms reactive trading

Investment resources and tools

Investors seeking to monitor oil prices and understand their potential portfolio impact can access various resources:

Market data and analysis:

• Energy Information Administration (US) – Comprehensive data on oil production, consumption, and inventories
• International Energy Agency – Global energy market analysis and forecasts
• Oil Price Information Service – Real-time pricing data

Investment tracking:

• Most major financial platforms provide commodity price charts and sector performance metrics
• Energy sector ETFs like XLE (Energy Select Sector SPDR) offer diversified exposure to energy companies
• Commodity futures and options allow more sophisticated hedging strategies (though these carry significant risk)

Important investment considerations

We hope the information in this article is helpful, but it isn’t financial, personal, or tax advice. Remember, the value of investments can go up and down, so you may get back less money than you put in.

Key investment principles

Think long-term: You should view investing as a medium- to long-term commitment, so be prepared to hold your money for at least five years. This time horizon allows you to ride out short-term volatility caused by commodity price swings and other market disruptions.

Understand your risk tolerance: Oil price volatility can cause significant short-term fluctuations in your portfolio. Ensure your investment strategy aligns with your ability to withstand these swings without making emotional decisions.

Tax considerations: Tax treatment depends on your individual circumstances, and tax regulations may change in the future. Different investment vehicles (stocks, bonds, ETFs, retirement accounts) have other tax implications.

Stay informed but don’t overreact: While understanding how oil prices affect markets is valuable, avoid making frequent portfolio changes based on daily commodity price movements. Maintaining a diversified, well-structured portfolio typically serves investors better than attempting to time energy markets.

Seek professional guidance when needed

If you’re uncertain how oil price movements affect your financial situation or investment goals, consider consulting a qualified financial advisor who can provide personalised guidance tailored to your circumstances.

Disclaimer: This article is for educational purposes only and does not constitute investment advice. Commodity markets, including oil, are highly volatile and complex. Past performance does not guarantee future results. Always conduct thorough research or consult with financial professionals before making investment decisions.