Welcome back to the MSI weekly newsletter! In this edition, I will explain how oil prices affect companies and the overall market.
The week that was:
Rising oil prices have caused inflation to increase even more. Oil is probably the most important raw material used by many companies. They get directly impacted as they have to pay extra for the oil.
For example, the main ingredient of WDFC's product is oil. Whenever the oil prices are high, the stock price of WDFC drops, and when the oil prices are low, the price of WDFC goes up. If you compare their six month charts, they are total opposites. WDFC is closely connected to oil, so they get hit hard by the force of high oil prices, but oil prices can also indirectly impact other companies.
Take Starbucks for example. At first thought, you would not relate oil to SBUX. Starbucks is not going to give out oil flavored coffees to their customers anytime soon! To understand how oil prices affect SBUX, you have to go back to the Starbucks owned farm in Africa where the coffee beans are growing. Once they have fully grown, they are plucked and loaded onto the truck.
The oil guzzling truck drives the beans to the African port, and are loaded onto the ship. Then the oil guzzling ship has to start a very very long journey to the U.S. Once the ship reaches an American port, the coffee beans are loaded onto another oil guzzling truck, and the truck drives the beans to a Starbucks warehouse.
That is a lot of money spent on oil to deliver coffee beans to Starbucks. And this happens around once a month. Plus, the Starbucks employees drive to work with their car that is most likely powered by gas, which is made out of oil.
While oil prices most obviously affect companies like WDFC, oil prices also usually affect companies that sell physical goods, like Starbucks, in a similar way. The only companies that are mostly safe from oil are software companies, as software cannot be loaded on a ship.
However, oil prices have started to decline from the second week of June, falling down 22% from its six month peak. Decreasing oil prices naturally causes inflation to decrease. It also has a positive effect on the overall market. Since mid-June, soon after oil prices started to decrease, the S&P 500 has gone up by 8%, while the Nasdaq has shot up by 11%.
The chart above shows this clearly. The dark blue line is the price of oil. The yellow line is the S&P 500 and the light blue line is the Nasdaq. Until the second week of June, oil prices were rising and the market was in a steady decline. But oil prices started to decline and have remained lower. That had an immediate positive effect on the market and it has started to rise.
Big update! I am currently working on a new Investor Education page for the website, which will include details about important terms and concepts related to investing. The Investor Education page will be up and running soon, so be sure to take a look at it!
Thank you for taking the time to read my newsletter. Happy investing!