Chart of the Week: Sustained Oil Prices Could Continue to Add Volatility in the Stock Market

June 3, 2022

The OPEC+ has agreed to increase oil production in the summer months but the producer cartel’s modest increase in output failed to calm concerns over the widening supply deficit.

In fact, oil prices are now headed for a sixth weekly gain with the West Texas Intermediate (WTI) trading at US$116.7 while the brent crude oil is at the US$117.5 level.

There were some speculations in the market that Saudi Arabia could significantly increase production but with a modest supply boost amounting to just 0.4% of global demand over July and August, it is uncertain if the US could turn Saudi Arabia into its ally to economically isolate Russia.

What does sustained oil prices mean for the stock market?

There are a lot of variables to look into when investors try to determine the near-term market trend.

However, with oil prices sustained at a high level and the continued supply chain disruption arising from the Russia-Ukraine war and lockdowns in parts of China, upward inflation pressure is likely to persist.

This could add headaches to the stock market especially with how the US Federal Reserve (US Fed) is looking to raise interest rates to fight inflation.

This means that the stock market volatility as seen over the last three months, could persist in the near-term.

What should investors do?

1. Buy commodity-related stocks

As oil prices continue to sustain above the US$100 level, investors can opt to buy commodity-related stocks such as oil & gas companies, plantation companies and even steel producers.

In an inflationary environment, prices of finished products made from these commodities tend to rise together.

Sophisticated investors could also consider commodities futures to diversify their portfolio.

2. Use options trading strategy

Aside from that, the volatility in the stock market also presents an opportunity for investors to dabble into options trading.

Given the bearish market sentiment and volatility in the stock market, a strip straddle strategy could be deployed to benefit from the swings in the stock market.

Another effective way to generate extra income during the volatile market is to use the covered call options strategy.

3. Invest into dividend play

Another effective way to preserve your portfolio during an inflationary environment is to buy into dividend stocks.

Tim has written about quite a few of the REITs in Singapore that offer attractive dividend yields. Check out his article for the 2 top Singapore Office REITs to buy for the rest of 2022.

Don’t sway from your investment plan due to near-term volatility

The three strategies mentioned above are just some of the ways that investors can invest to take advantage of the volatility in the stock market.

However, if you have set aside your investment objectives, don’t swerve from them just because of the near-term volatility.

An obsession with inflation and the volatility in the stock market should not determine your investment objectives and risk-tolerance level.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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