Know Your History: How War Can Affect Oil Prices

[Image] Know Your History: How War Can Affect Oil Prices Listen… Stock prices can go up and down for a lot of different reasons. But the possibility of war (or even just tensions between countries) is the biggest catalyst of them all. And now, we’re seeing that terrible possibility creeping up again as [the situation in the Middle East]( is overheating. Over my many years in the stock market, I’ve traded through dozens of geopolitical conflicts. In other words, I know what to look for… When the tensions of potential war are rising, it’s time to look to oil stocks. IMPORTANT DISCLAIMER: In horrible times like this, it’s important to remember that we don’t root for bad events to make money. That’s bad karma and goes against my beliefs. But keep in mind, as traders, we must understand the world as it is, not as we wish it to be… With that in mind, it’s time for a short history lesson… Based on prior events, how will oil prices react to global tensions this time? Keep reading to hear my thoughts… Operation Desert Storm First, let's talk about a situation that happened in 1990-1991, called Operation Desert Storm or “the Gulf War.” Iraq invaded Kuwait, and because both of these countries produced a lot of oil, people got worried about whether they could get enough oil during the war. So, the price of oil went up — in fact, it doubled from $20 to $40 per barrel. Once the US and other countries stepped in and Kuwait was free, the oil prices went back down again. Again, this was the easing of uncertainty traders were no longer as worried about oil supplies being cut off, causing the prices to revert to the mean. You’ll notice this trend continuing as we move through history… The Post-9/11 War in Afghanistan In 2001, after the tragic events of September 11, the USA went to war in Afghanistan. Now, Afghanistan isn't known for its oil, but the war still had people on edge about the stability in nearby oil-producing countries. When the war in Afghanistan began, people and businesses who buy and sell oil got nervous. The concern wasn’t really about Afghanistan’s oil, but rather about the overall stability in the Middle East. There were worries like: What if the war spreads to other countries? What if it causes problems with the equipment used to get the oil out of the ground or to ship it to other places? There were a lot of “what ifs.” And as we know, during times of uncertainty, traders often prepare for the worst. This nervousness had a direct impact on oil prices. If the war were to spread or cause disruptions in nearby oil-producing countries, it might mean that for a while, there would be less oil available to buy. And if there’s less of something available that people still need (like oil), the price of that thing usually goes up. That’s exactly what happened in this case, and this is why it’s so important to know your history. The 2003 Invasion of Iraq Two years later, in 2003 the USA and its allies invaded Iraq, shaking the oil markets again. Iraq is one of the largest oil producers in the world, with its economy and global oil markets deeply interlinked. The country is a significant member of the Organization of the Petroleum Exporting Countries (OPEC), which plays a vital role in determining oil prices globally. That’s why this military intervention was immediately flagged by global markets as a potential risk to oil production. The Middle East, with countries like Saudi Arabia, Iran, and Iraq, is pivotal to maintaining a balanced oil supply worldwide. When the war commenced, oil prices experienced a noticeable uptick. To put it into perspective, oil that was trading at approximately $25 a barrel experienced a surge, elevating prices to above $35 a barrel as the conflict unfolded. This initial spike can be attributed to the fears and uncertainties surrounding the stability of oil production and distribution amidst a war scenario. Even though the price did come down a bit after the war started, it stayed higher for longer than before because the situation remained unstable for a long time. Today’s Situation These days, not much has changed… When there are conflicts between nations that produce a lot of oil, oil stocks (and crude oil prices) can make major moves … usually to the upside. For instance, currently rising tensions in the Middle East are sowing doubt about whether oil production might be interrupted. And what have we learned today? Historically, this worry can cause oil prices to go up. Even with new energy sources like wind or solar power becoming more common, oil is still very important worldwide. This is why any big changes in oil prices can shake up the markets. In all these situations, we can see that war and conflicts make people worried about whether they will have enough oil. This is simple supply and demand, and if you can identify its ebb and flow, you can potentially make actionable trades based on these moves. Closing Thoughts My thoughts and prayers are with everyone (and anyone) affected by the current tensions in the Middle East. Again, I’ll never root for a negative catalyst to provide me with a trading opportunity. But I’ll try to make appropriate trades based on the macro picture I’m seeing. After all, that’s all we can do as professional traders. As always… Stay Street Smart, Jeff Zananiri P.S. My overnight trade idea has already been delivered to Burn Notice Members, but the next one could be even bigger! 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