Compared to other asset classes, the oil price has been more susceptible to geopolitical events.
That’s what analysts at Moody’s Ratings said in a new Moody’s report which looked at the short and long-term reaction of financial markets to “different shocks” since 2001, “to better understand some of the credit effects of geopolitical events”.
The analysts pointed out in the report that the oil price has been more susceptible to geopolitical events “because of, among other reasons: one, the global economy’s dependence on oil; and two, concentrated proven oil reserves in regions that are often subject to political instability, conflicts, or sanctions (such as Russia, Venezuela, or Middle Eastern nations)”.
Moody’s analysts highlighted in the report that 11 out of 15 shocks in their study involved major oil-producing regions.
The analysts also noted in the report that the direction and size of impact varied depending upon the event’s influence on underlying fundamentals.
“The direction depends on whether markets perceive events as potentially disrupting supply (driving prices upwards) or casting a shadow on global economic activity and oil demand (driving them down),” they added.
“It is possible that these drivers are triggered at the same time, and sometimes with one as the dominant influence,” they continued.
“For example, tension between U.S.-Iran in the early-2020 raised oil supply concerns, which should have pushed prices higher. But it coincided with the pandemic that ruptured global demand for oil, leaving prices to drop by almost 40 percent during the first half of 2020,” they went on to state.
The analysts outlined in the report that the countries involved in a conflict, and their share in global oil supply and demand, “influence the size of the impact”.
“For example, events affecting large oil producers such as Russia or Middle Eastern nations have caused significant oil price increases due to supply worries,” the analysts said.
“By contrast, events involving major oil consumers, like the U.S. and Europe, oil prices trended down on account of future demand concerns (e.g., fall in prices after the 9/11 terrorist attacks),” they added.
“Similarly, oil price volatility spiked higher during the first 30 days of geopolitical events involving major oil producers or consumers,” they continued.
Moody’s analysts revealed in the report that, “like other asset classes, the impact on oil price gradually settled down from its peak impact in most cases over the short-term”.
“Considering the … example of [the] Russia-Ukraine war – which drove oil prices to high levels in early-2022 – prices normalized back to pre-event levels by mid-2022,” they said.
“The correction occurred as the anticipated disruption to the supply of Russian crude did not materialize. Russian crude exports post-sanctions were just rerouted maintaining its share of global supply. Also, rising supply from non-OPEC countries (mainly the U.S.) and a slowdown in global economic growth from the post-pandemic recovery weighed on oil prices,” they added.
Lately, changing dynamics in the oil industry – such as rising share of non-OPEC in global production, excess production capacity with OPEC, availability of global oil inventories – has somewhat toned down the severity of impact during shocks, Moody’s analysts stated in the report.
The analysts warned in the report that any further escalation in the Middle East or the Russia-Ukraine war, or a major disruption to key trade routes (e.g., the Strait of Hormuz or the Red Sea), poses risks of higher oil prices.
Conversely, the escalation of tensions between Mainland China and Taiwan into a full-blown conflict or structural threats to Chinese economic growth pose risks of falling prices, the analysts noted.