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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.
Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.