How Does Geopolitics Disrupt the Investment Logic of "Black Gold" in Oil?

TradingKey - When it comes to oil, many people focus solely on supply and demand factors such as inventory data, OPEC output, and economic demand.

However, it is more so overshadowed by the complexities of geopolitical factors.

Oil is one of the world's most important energy sources, but unlike wheat or copper, its distribution is not widespread. It is produced in highly concentrated areas, and its transportation routes are extremely sensitive.

Around 60% of global oil exports come from geopolitically sensitive regions such as the Middle East and Russia. Disruptions in key transportation routes like the Strait of Hormuz and the Malacca Strait can directly choke off oil circulation at critical points.

So how do these risks gradually affect oil prices? They primarily transmit through three pathways:

Supply Disruption Risks: Wars, sanctions, and armed conflicts can directly lead to oilfield shutdowns, pipeline explosions, or port blockages.

Transportation Route Obstacles: The Strait of Hormuz sees approximately 17 million barrels of oil transported daily (accounting for 20% of global maritime traffic). If conflicts erupt in this area, rumors of any blockade will cause spikes in oil prices.

Market Sentiment Amplification: Geopolitical uncertainties can heighten investor panic or greed. Even when events do not affect supply levels, “anticipatory” trading behaviors can lead to price deviations from reasonable ranges, resulting in irrational volatility.

Often, when geopolitical conflicts erupt, oil prices behave like a roller coaster—soaring dramatically or plummeting sharply.

Why is that? Because oil is incredibly sensitive. It is not just a commodity; it also serves as a means of political leverage.

Its production and transportation are concentrated; any disturbance sends shockwaves through the market.

Can a Single Conflict Send Global Oil Prices Soaring? Why Is the Market So Sensitive?

Despite daily discussions of supply and demand in the oil market, what truly drives price fluctuations is often those “events that haven’t happened yet but could.”

For example, take the recent Israel-Iran conflict. Iran, as a major global oil producer with an average daily output of over 3.3 million barrels and consistently high export volumes, has been under scrutiny.

On June 13, Israel carried out airstrikes on Iran's southern Bushehr province refinery. This marked Israel's first attack on Iranian energy facilities and the first assault on an Iranian refinery since the Iran-Iraq War.

Immediately following this news, the market became tense. Investors began to worry about potential disruptions to oil supply, leading to price increases. On that day, WTI and Brent crude prices soared to $72.98 and $74.23, respectively—a rise of more than 16% compared to early June.

Even more concerning was Iran’s subsequent suggestion that it might close the Strait of Hormuz—the crucial route for one-third of global maritime oil supplies.

If this blockade were to occur, one-fifth of global oil supplies would be interrupted; seeing prices skyrocketing to $120 wouldn’t be far-fetched.

(Source: Freepik)

So you see, wars don’t necessarily have to happen in order for prices to fluctuate; as long as market sentiment perceives any possibility of trouble, prices will react.

At the onset of warfare, oil prices will initially spike due to panic. However, as time passes and markets begin to cool down, investors will start assessing actual impacts.

If tensions ease, oil prices could fall back.

If conflicts escalate or involve other nations, oil prices might continue climbing;

Furthermore, if major players such as the U.S., Saudi Arabia, or Russia signal their capacity to increase production and fill supply gaps, market sentiment can quickly shift back towards calm.

Therefore, it’s essential not just to watch oil prices but also to keep an eye on news developments in diplomacy and military movements.

If conflicts represent the "visible black swans," then sanctions are like the "invisible handcuffs."

The U.S. sanctions on Iran and Russia serve as prime examples.

After the U.S. withdrew from the Iran nuclear agreement in 2018, it launched a comprehensive crackdown on Iran's energy, finance, and trade sectors. Many countries and businesses had to reduce or even halt their crude oil imports from Iran to avoid secondary sanctions.

Similarly, following the Russia-Ukraine conflict, the U.S., along with European nations, imposed multiple rounds of energy sanctions on Russia, affecting over 180 oil tankers and several major energy companies.

So What Exactly Do These Sanctions Impact?

The effects of sanctions go well beyond merely reducing exports.

They act like knocking over a domino—triggering a series of chain reactions.

First, there is a reduction in supply.

With decreased supply, markets naturally become tense, leading to rising oil prices.

Second, there is a shift in trade flows.

Countries like India that previously imported large quantities of Russian crude have started sourcing from the Middle East and the United States instead. This change not only disrupts existing trade chains but also tightens supplies in certain regions further.

Finally, there is chaos in pricing mechanisms. The futures market starts to become sensitive while volatility increases in spot markets; prices are no longer determined solely by supply and demand but rather by "who dares to buy and who doesn't."

While conflicts and sanctions impact the supply side, a trade war affects the demand side.

In 2025, a United Nations report indicated that global economic growth might slow to 2.3%, lower than the previous year.

This downturn stems largely from the ripple effects triggered by the U.S. imposing additional tariffs on countries around the world.

This trade war isn’t just hitting goods—it’s also impacting the crude oil market.

Slower economic growth means reduced industrial production, fewer transportation activities, and declining factory orders—all of which are major sources of crude oil demand.

According to data from the International Energy Agency (IEA), global crude oil production is expected to rise by 1.8 million barrels per day in 2025, reaching 104.9 million barrels per day, surpassing the projected demand of 103.8 million barrels per day. Additionally, the IEA projects that global crude oil demand will increase by 720,000 barrels per day in 2025, which is lower than the previous forecast of 740,000 barrels per day.

In July 2025, the International Energy Agency (IEA) projected that Brent crude oil prices would average $69 per barrel in 2025 (up from a previous estimate of $66), and $58 per barrel in 2026 (down from a prior forecast of $59).

With demand falling short of expectations while supply fails to adjust downward in time, the market can only rebalance itself through price adjustments.

(Source: Freepik)

1. Identify the "Signal-to-Noise Ratio"

One characteristic of the oil market is that prices react to news, but not every reaction leads to profitable trades.

What’s necessary is to distinguish between "substantial impact" and "emotional outburst."

Will this event genuinely affect oil prices, or is it merely an instance of "verbal threats"?

For example, if a country threatens to blockade the Strait of Hormuz but hasn’t taken any action yet, there may be a price increase of 5%.

However, if you find that actual supplies remain uninterrupted and transportation is still proceeding normally, then this price movement is due to emotional fluctuations—not a trend reversal.

2. Develop an “Anti-Emotion” Trading Strategy

When both the VIX (Volatility Index) and OVX (Oil Volatility Index) surge simultaneously, causing oil prices to rise by more than 5% in a day without any evidence of actual supply disruptions, it indicates that market sentiment has become "overblown."

In such cases, the real opportunity lies not in chasing rising prices but in waiting for signs of a pullback.

At the same time, you can set up a dynamic stop-loss for protection. For instance, you might use ATR (Average True Range) multiplied by 2 to establish your stop-loss levels.

3. Diversify Your Investments

We strongly emphasize not placing all your assets into one investment type.

You could consider allocating some funds to energy-related stocks. When oil prices increase, these companies often experience a corresponding rise in profits. Large firms like ExxonMobil and Shell have diverse operations and strong risk resilience, making them solid choices.

Additionally, you might want to consider gold. When volatility spikes in the oil market due to geopolitical conflicts, gold often serves as a haven. It may not necessarily increase in price, but it typically won’t decline in line with oil; instead, it could help stabilize your overall investment portfolio.