Commodity prices are often overlooked as a secondary concern and just 'one of those things' to keep an eye on when discussing the merits of investing in ASX shares. But I think there is often more than meets the eye in this space from time to time – and it can help us invest just that little bit better.
So according to reporting in the Australian Financial Review (AFR), oil prices slumped to a 21-year low overnight. West Texas Intermediate (WTI) Crude, which is the oil benchmark for the United States, tumbled to its lowest level since 1999 this morning to under US$15 a barrel. This comes despite an OPEC agreement last week to cut production levels. Its seems that the ongoing slump in economic activity and worldwide travel restrictions and bans are too much for production cuts to overcome.
So what problems does cheap oil pose for ASX shares? Could these moves actually lead to another stock market crash?
How can cheap oil be a problem?
There are two factors at play here. One is sentiment and the other is tangible economic impacts.
Oil is often described as a global barometer of economic activity. If the global economy is growing, the demand for oil usually rises as people buy more goods and services, travel more and have more money to spend.
Conversely, the opposite is also true (which we are sadly seeing right now). And when investors see a low oil price, they know that it's not a good sign for the global economy. In this way, low oil prices can have a 'sentiment effect'.
But there are also tangible effects – and these effects come as a 'double-edged sword'. Yes, cheap oil is good for many companies. Woolworths Group Ltd (ASX: WOW) will benefit from cheap oil as the cost of freighting products from warehouse to store is cheaper. Large miners like Fortescue Metals Group Limited (ASX: FMG) also stand to benefit, as the cost of fuelling the trucks and machinery needed for mineral extraction becomes lower.
Airlines like Qantas Airways Limited (ASX: QAN) would also be a huge beneficiary, if only they were able to fly their planes right now.
However, those companies that extract or refine crude oil itself are not such happy campers. Oil drillers like Woodside Petroleum Limited (ASX: WPL) would be feeling the pain as they sell oil straight out of the ground at market prices. Refiners like Caltex Australia Limited (ASX: CTX) would also be struggling with this new paradigm. It's probably why a potential suitor for Caltex walked away from the company today.
Foolish takeaway
I would not say that cheap oil can crash the ASX per se, but it can lead to a negative sentiment spiral all the same. In this way, I think investors should give the price of oil a glance or two over the coming weeks and months. It will give you a fuller picture of what's happening in the global economy if nothing else!
