The Effect of Recent Political Events on Oil, Gas, and Gold Prices

Among the many factors that influence the prices of WTI crude oil, Brent oil, natural gas and gold, are geopolitical events. Since global supply chains are interconnected, any disruption in any part of the world can have an impact on prices in the financial markets. Of course, certain countries have a more significant impact than others. These are countries that are among the largest exporters of the largest consumers of these commodities.

Another factor to keep in mind is that all the prices in the global financial markets are quoted in the US dollar, which is why fluctuations in the greenback always impact prices. This is because, when the US dollar rises, assets quoted in the currency become more expensive for holders of other currencies, resulting in a dampening effect on WTI crude oil prices, natural gas prices and gold prices in USD.

Effect of Political Events on WTI Crude and Brent Oil Prices
The Context

OPEC (Organisation of the Petroleum Exporting Countries) is a coalition of 13 of the world’s largest oil-producing countries, including Saudi Arabia, Iran, Iraq, Kuwait, and Venezuela. This makes the coalition quite powerful in allocating the supply of oil globally, which impacts its price. While Russia is not a member of the OPEC, it controls more than half of the global supply of oil, and about 40% of Europe’s gas supply, which makes this country a very important entity in the oil market. Before Russia’s recent attack on Ukraine, it used to collaborate with OPEC to determine global production levels and, consequently, the price of crude oil. But, since the beginning of the war oil and gas prices have risen significantly.

OPEC usually aims to maintain crude oil prices above $100 a barrel. Despite their best efforts, there have been two historic instances when crude oil prices have declined sharply. The first was in 2014 when US shale oil output reached record levels due to production efficiencies which significantly lowered break-even prices. Despite the huge rise in shale oil supply, OPEC refused to curtail its supply of crude oil, resulting in an oversupply of oil in the market, which took prices below $50 a barrel.

More recently, the outbreak of the pandemic resulted in a steep decline in the demand for oil and oil products due to a massive contraction in economic activity around the world, resulting from government-imposed lockdowns. In fact, WTI crude oil prices plummeted 306% during a single trading session to settle in the negative for the first time in history on April 20, 2020.

Effect of Recent Political Events and Oil Prices

In the first half of 2022, Brent and WTI crude oil prices were largely driven by the Russia-Ukraine conflict. Western countries responded to the invasion of Ukraine by imposing sanctions on Russian oil. This led to concerns around a shortage of global oil supply and took oil prices sharply higher. At its peak, the WTI crude oil price topped $140 per barrel.

The EU, which is highly dependent on Russia for its energy needs, has been debating whether to stop purchasing oil from the country. The bloc has already imposed a ban on Russian oil as part of its sanctions against the country, leading to a rise in crude oil prices.

While OPEC has been aiming to increase production after having cut output during the pandemic, the cartel has not been able to meet its target.

Effect of Political Events on Gas Prices
The Context

Natural gas has begun to have a larger impact on the state of global energy needs. While natural gas was earlier used mainly for industrial purposes and residential cooking, it has now found demand in electricity generation and powering vehicles. More than 23 million vehicles around the world are already powered by natural gas as it is both environmentally friendlier and more cost-effective than petrol.

Traditionally, the global natural gas market was highly fragmented and governed by long-term private contractual relationships between suppliers and consumers. This market has become more integrated due to the availability of securitised and tradable LNG (liquified natural gas).

The US, Russia, Iran, and Canada are the world’s largest producers of natural gas, while the hungriest consumers are China, Japan, Germany and India.

The onset of the coronavirus pandemic in 2020 caused natural gas prices to plunge to historical lows due to lower industrial and transportation demand. Further volatility was caused by efforts of governments around the world to switch to renewable energy sources.

In 2021, natural gas prices skyrocketed as demand recovered after the reopening of economies. Due to production cuts in the previous year and supply chain disruptions, the global supply of natural gas could not keep up with the sudden rise in demand, especially in the US and China.

Effect of Recent Political Events and Natural Gas Prices

The ongoing Russia-Ukraine conflict has also impacted natural gas prices. Russia is responsible for 40% of the gas consumed in the European Union, which has begun imposing sanctions. On the other hand, most of Russia’s gas supply to the EU comes through pipelines in Ukraine. These pipelines have been disrupted due to the Russia-Ukraine conflict, restricting supply and pushing natural gas prices higher. Natural gas prices have jumped from $6 MMBTU (metric million British thermal units) at the beginning of the conflict to $38 MMBTU in June 2022.

Effect of Political Events on Gold Prices

The Context

Gold charts have maintained an upward trajectory over the past 70 years. The price of yellow metal has risen from less than $100 an ounce in the 1950s to around $2000 per ounce in 2022. Gold has historically been considered a store of value and a safe-haven investment.

Central banks tend to be the biggest buyers of gold since they need to keep monetary reserves apart from paper currency, and the yellow metal is the default choice. During periods of high volatility in the financial markets or economic or political uncertainties, investors look for assets that are considered safe-haven options, which send gold prices in USD higher. On the other hand, the supply of gold around the world is limited, with there being no increase in the supply of the yellow metal in the last six years.

Effect of Recent Political Events on Gold Prices

During the pandemic, the US injected billions of dollars into the economy to support demand for goods and services. However, this created a sharp increase in the money supply in the economy, resulting in inflationary pressures. To cool inflation, which had reached over 40-year high levels, the Federal Reserve began raising its benchmark interest rate in 2022. The rising interest rates made the US dollar more attractive to hold for investors, who began buying more greenback. The US dollar index, which measures the greenback’s performance against six major peers, spiked to a 10-year high on June 13, 2022.

A rising US dollar exerts pressure on gold charts for two reasons. Firstly, since gold prices are quoted in USD in the global financial markets, a rise in the US dollar makes the yellow metal more expensive for holders of other currencies. Secondly, the US dollar competes with gold for space in investor portfolios since both are considered safe-haven assets.

On the other hand, the Ukraine-Russia conflict also impacted gold prices. This is because Russia is a large producer of yellow metal, and the ongoing economic sanctions have affected its supply.

Like any other asset, the prices of WTI crude oil, Brent oil, natural gas, and gold depending on demand and supply. If geopolitical tensions affect the demand and/or the supply of these assets, there will be fluctuations in their prices. Keeping an eye on world news helps traders make more informed decisions.