You will be able to explain how supply decisions and conflicts move oil prices and which sectors feel it.
Oil is the commodity most likely to carry a geopolitical shock into your portfolio. It feeds into transport, plastics, electricity and food, so a move in its price shows up in inflation data, company margins and central bank decisions within weeks. Marcus owns no oil companies directly, yet when he traced it through, oil touched every one of his share holdings in some way. This lesson shows how supply decisions and conflicts move the price, and how to see who feels it.
OPEC, the Organization of the Petroleum Exporting Countries, was founded in 1960 to coordinate its members' oil policy. Since late 2016 it has worked with a group of other producers, Russia the largest among them, in an arrangement known as OPEC+. Together they set production targets, and their decisions to raise or cut output are among the most watched events in commodity markets.
What gives those decisions force is spare capacity: oil production that can be brought online within weeks if needed. Most of it has sat with a few Gulf producers, Saudi Arabia above all. When spare capacity is large, a supply disruption elsewhere can be offset, and price spikes stay limited. When it's thin, even a small disruption can move prices sharply, because nobody can quickly replace the lost barrels.
So the same headline, a pipeline attack or a new sanction, can move oil a little or a lot depending on how much spare capacity exists at the time. When you read about a supply shock, the first question is how much spare capacity is available to cover it.
In 1973 Arab members of OPEC imposed an embargo on several countries, and the oil price roughly quadrupled within months, feeding the inflation of the 1970s that lesson 3.1 described.
Supply decisions can push prices down too. In November 2014 OPEC chose not to cut output in the face of rising US production, and oil prices more than halved over the following year. In March 2020, as the pandemic crushed demand, a price war broke out between Saudi Arabia and Russia. In April OPEC+ agreed a record cut, but storage was filling up, and on 20 April 2020 the expiring US oil futures contract settled below zero for the first time.
US shale oil changed the speed of the market's response. Shale wells can be drilled and brought into production much faster than conventional fields, and they deplete faster too. When prices rise, US producers drill more, and output follows within months rather than years.
That response has a lag, so it can't stop a spike. It does tend to limit how long high prices last, because new supply arrives. Shale producers have also become more cautious since the 2014 to 2016 slump, prioritising returns to shareholders over growth, so the response can be slower than in the early shale years.
Higher oil prices move money from oil consumers to oil producers. Airlines lose, because fuel is one of their largest costs. With made-up figures, if fuel is 30% of an airline's costs and the oil price rises 40%, its total costs rise about 12% before any hedging. Chemical makers, shipping companies and oil-importing countries also lose. Oil producers and oil service companies gain, and so do exporting countries' currencies.
Oil feeds directly into headline inflation through petrol and electricity, and indirectly through transport costs in almost everything. A sustained rise can push central banks towards tighter policy, which then hits bonds and long-duration shares, the chain from lessons 3.3 and 3.4.
Singapore is a major refining centre, with large refineries and petrochemical plants on Jurong Island, one of the world's largest ports for ship fuel, and a hub for oil trading firms. That ties local companies and banks to energy prices in ways that aren't obvious from their names. Refining margins, shipping volumes and trade finance all move with the oil market.
The collapse of the oil trader Hin Leong in 2020, during the oil price crash, left several banks including Singapore's with losses on loans to it. For an investor, it's a reminder that a bank's exposure to commodities sits in its loan book and only becomes visible when something goes wrong.
Marcus went through his holdings with this in mind. His bank shares carry oil exposure through trade finance and loans to energy companies. His S-REIT is hurt if oil pushes up inflation and interest rates. His world ETF holds some energy producers, which gain, and many energy users, which lose. His chip stocks are mostly affected through rates and the cost of running fabs. Only his T-bills sit outside the chain. Now list your own holdings in order of how sensitive each is to oil, and note whether each one gains or loses when oil rises.
List your holdings that are most sensitive to oil prices and write whether each gains or loses when oil rises.
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