Brent back above $90: what an investor should do

This March will go down in the history of world markets. Such extreme volatility in a short period of time in oil prices has not been seen in all the years of observation. In two days, a barrel of Mark Brent and WTI went from $80 to $120, and then fell back sharply to $80-85, at times falling even lower. Valery Emelyanov from Movchan's Group analyzes what will happen next and what investors should do about it.

Financial markets are the aggregate opinion of millions of participants, each of whom risks real money. And now this opinion is quite certain: everything that is happening is not an economic catastrophe.

Oil started to rise in price even before the hostilities started, which is quite typical for the escalations in the Middle East. Since the beginning of the month, it has been trading in a wide range of $70-100 (at closing prices for Brent) against the usual $60-75 seen over the last year. An upward shift in the trading range of about 25% is certainly a lot, but not unprecedented.

There is also a lot of dynamics in the currency market, and it is quite understandable. The dollar has risen against the world basket (according to the DXY index) by 3% in two weeks. Against the dollar, the rates of major currencies fell: the euro lost 3.5%, the pound - more than 3%, the Swiss franc - 2.5%, the yen fell by 1.3%, the yuan - by 0.4%. U.S. investors are reducing exposure to overseas markets and returning assets to the United States.

The flight from risk can also be seen in the dynamics of U.S. government bonds: prices of 10-year treasuries have fallen since the end of February, while yields have risen - from 3.9% to 4.15-4.2% per annum. Shorter one-year securities jumped from 3.5% to 3.6%, however, soon returning back. This suggests that investors did not go into US securities, but temporarily went into cache.

In other markets everything looks even calmer. Stock indices in the US, Europe and Asia have been swinging up and down in the range of 0.5-1.5% for the last few days, but there is no downtrend. The VIX volatility index was rising to April 2025 levels, but has already retreated to moderate fall levels. Gold is hovering near the same $5200 where it was before the war started.

Completion of the operation within two to three months is the basic scenario, which the market is now laying down as the most probable. The hot phase is a few weeks, then a lull. Iranian military capabilities are significantly weakened, but the regime does not fall. The Strait of Hormuz remains open or closes for a very short time.

The strategic oil reserves of key importing countries total about 2 billion barrels. This is about 20 days of world consumption. The U.S. state reserve alone is more than 400 million barrels, which, given the shortage of supplies through the Strait of Hormuz (about 15 million barrels per day) gives a month of substitution. On March 11, the International Energy Agency said it was ready to release a record amount of oil to the market, freeing up reserves by more than 182 million barrels. The exact amount is unknown, but assuming that an additional $182 million barrels will come to the market, it will be enough for about 12 days.

There is essentially nothing happening to the markets in this scenario. The market has already digested this scenario. Defense and oil related companies may gain a little. All other sectors continue to live their lives.

Investor's logic: if you built your portfolio correctly before the conflict started, you don't need to do anything. If you are now thinking "buy oil futures while they are rising" - don't. Commodities markets are highly speculative, driven by robots and herd instinct. This is not where a conservative investor is looking for alpha.

A six-month to one-year war. A scenario in which the hot phase does not end quickly, exchanges of blows continue, and the Strait of Hormuz is either closed or operating with constant interruptions. 75% of users of the Polymarket prediction site are betting that the war will last until the end of June. That's a lot, let's not ignore that scenario.

Oil in this scenario may well consolidate around $100-120. But this would not be a catastrophe for the world economy. Compared to the price shocks of the 1970s and 1980s, the world has become less dependent on the barrel: every dollar of GDP now requires 4 times less oil than in those years. Worse is the case with liquefied natural gas: Qatar is the largest exporter of LNG, and it will not be possible to ramp up U.S. liquefaction and supply capacity in just one year.

Let's look in a little more detail at how different economies will react to this.

The US will suffer the least. It is a net energy exporter, its infrastructure is not suffering, and the military-industrial complex is receiving new orders. With oil above $100, inflation, according to most estimates, can rise by less than 1%, and there will be no recession.

Europe will return to stagnation. With oil above $100 - GDP could lose about 1% of its growth, inflation and rate hikes are also very likely. This will put pressure on the stock and bond markets.

China is well protected by reserves. Around 900 million barrels, that's for six months of consumption, but it will still suffer from expensive crude, falling exports to Europe and a slowdown in its Southeast Asian neighbors, also dependent on supplies via Hormuz.

India is the most vulnerable link. Its own reserves will be sufficient for only 3-4 weeks. It receives about 2.7 million barrels per day through Hormuz, and emergency supplies from Russia are not able to fully replace this volume. India should be watched as an indicator of the severity of the crisis.

The Gulf countries (Saudi Arabia, UAE, Bahrain, Kuwait, Qatar, Oman) find themselves in an awkward geopolitical position. Their "safe haven" status is being questioned - local real estate markets are already reacting to the outflow of expats, and months of war could cause a major price collapse.

Investor's logic: This scenario is not a disaster, but a noticeable correction in expectations. World GDP will miss 1-2% of growth. Those who invested in oil-dependent regions (Southeast Asia, Europe, Emirates) will feel it more strongly. Those who held a diversified global portfolio with a focus on the US will feel it less.

If the operation lasts for a year or more at sustained high oil prices - above $100 - projects that were previously on the verge of profitability become economically viable: new fields, pipelines bypassing Hormuz, accelerated development of renewable energy.

Venezuela, Nigeria, and Mexico have an incentive to increase production. The U.S. can produce more shale oil and gas, although liquefaction capacity cannot be increased quickly. In 2-3 years, the supply will cover global demand with reserves, and oil will return to more moderate levels during this time or even earlier.

In such a scenario, it is more difficult to make linear forecasts, so let us turn to historical analogies. Studies of market returns for the entire 20th century show that countries that avoided wars on their territory - the United States, Australia, Canada, Sweden, Switzerland, and the United Kingdom - showed real returns on stocks averaging 6.5% per annum and on bonds 1.8% per annum.

The countries directly affected by the war - Germany, Japan, France, Italy, Belgium - returned 4.2% on equities and minus 0.3% on bonds. In the worst of the cases, the German case, bonds over 100 years yielded minus 2.3% per annum in real terms. This means that less than 10% of the initial capital would have remained and more than 90% would have been lost.

The median real (above inflation) return of country stock markets (excluding the US) from 1921 to 1996 was only 0.8%, meaning it was barely indistinguishable from zero. Of the roughly 35 markets, 11 pieces simply "died": these are the post-World War II Eastern European markets, and the post-Nasser Egyptian market.

Three conclusions follow from these data.

First, bonds do not protect against war inflation. Price growth in war-torn countries was 6.1% per year for the century, compared to 3.5% for those not affected by war. Real bond yields go negative in war.

Second, stocks protect better, but only if the company itself and its jurisdiction survive. Between 1940 and 1949, the real return on German stocks was minus 10.3% per annum, Japan minus 25.7%. That completely destroys portfolios.

Third, trivial but true, markets survive where states avoid hyperinflation, civil wars, extreme left or extreme right governments, and direct military action on their territory.

The best place for capital in wartime is a country that is as far away from the war zone as possible and yet has a sustainable socio-economic model.

Diversification is also important, both in terms of geography and asset classes. Stocks and bonds of developed countries are the base. But again, not individual markets and individual companies, but large portfolios of funds.

Real estate, especially in a troubled region, is a bad asset. It is easy to destroy or seize, it easily loses tenants and potential buyers, and therefore its value is very tentative. A real estate portfolio, preferably of tradable funds, is a more flexible and safer solution.

Bonds and other "low-risk" assets like emerging market deposits with generous rates have historically looked like a lottery: they generate high and stable returns until the first military conflict, coup, or revolution - which can wipe out your capital.

Gold can work well for a small fortune. But if you have a large capital, the metal becomes difficult to store or sell at a fair price in a time of crisis. A safe with gold in a warring country is a story of someone coming to you soon with guns and demanding the keys.

Commodity speculation is an unreasonable risk for a conservative investor. Oil, gas and gold markets are highly dependent on the behavior of algorithms, spontaneous behavior of traders and statements of politicians. It is impossible to calculate their movement, but it is easy to lose money.

Bottom line, war is always bad for the economy. There is no argument that it is good for the short term. But history also shows that the world economy is resilient. It has survived two world wars, dozens of regional conflicts, oil embargoes and nuclear threats.

An investor who understands this and keeps a portfolio in line with this understanding does not have to do anything extraordinary. This is what a professional approach to money management is all about.

This article was AI-translated and verified by a human editor