Investors around the world are feeling the pain of what is now the second-deepest oil rout on record. But if history is anything to go by, lower oil prices will actually result in a strong rebound for equity markets around the world.
Oil prices have collapsed since June last year as a result of a massive oversupply in the global marketplace, coupled with waning demand. Last June, Brent crude, the global benchmark, was changing hands for around US$115 a barrel but it has since crashed 60% to trade at just US$46.11 a barrel.
Indeed, energy stocks have worn the brunt of it. Since mid-June last year, Senex Energy Ltd (ASX: SXY) has retreated 60% while Santos Ltd (ASX: STO) has fallen 50%. BHP Billiton Limited (ASX: BHP) and Woodside Petroleum Limited (ASX: WPL) have also tumbled 21% and 13%, acting as a major drag on the overall S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).
Right now, investors are focused on the doom and gloom of the situation. Some energy producers are at risk of going out of business while major projects could be canned, potentially resulting in higher unemployment. But when the oil rout does eventually bottom out, investors could instead focus on the opportunities being presented by the situation.
As quoted by The Australian Financial Review, AMP Capital chief economist Shane Oliver said that while he expects a 10 to 15 per cent correction in shares in the coming months, he also thinks "the lower oil price will help drive shares higher this year."
The fact is, consumers benefit substantially from lower oil prices in the form of lower transportation costs. These savings then tend to result in greater consumer spending which helps drive economic growth. Additionally, business costs can also fall resulting in greater profits which should drive interest in equities.
Although it might seem unnerving putting your hard earned money to work in a volatile stock market, Australian shares remain an excellent way to build your wealth in the long-run and now is still a perfect time to be buying.
