Signals from the Strait: Studying the Leading Effects of Oil Price Shocks on Private Markets

All eyes are on oil. With the Strait of Hormuz transformed into a critical chokepoint, we examined how oil shocks have impacted private markets in the past and how the historical market results may inform present market reactions.

We compared the WTI crude index with the contribution levels to energy-focused natural resource private funds to see what effects price shocks will have on private market investment interest. We selected that index as it best represents an American market perspective and is slightly insulated from the direct supply effects on present disruptions.

Key Takeaways

The first notable point on the graph is 2007-2008, when both prices and private market investment levels were rapidly growing in value. The 2007 oil run-up—driven by stagnant supply, escalating demand, and speculation—gave way to a crash as the recession cratered the global economy. Similarly, the private contribution rates also crashed.

The time delay between these events is quite short: 1-2 quarters. That implies both markets saw the underlying reduction in demand because of recession and cooled their investments synchronously.

The next shock was a reversal: In 2014 a glut of oil supply driven by the U.S. shale expansion combined with softening demand led to another strong correction. In this case, however, the private contribution rate seemed unphased as it increased a year later before levelling off again. That may have been driven by investment interest in shale or a longer-term view that prices would rebound. Regardless, we saw private markets detach from prices when a positive longer-term view emerged.

Finally, we look at the shocks of 2020 and 2022, caused by the pandemic and the Ukraine war, respectively. Both events drove prices sharply: one down from reduced demand and one up from reduced supply, respectively.

The 2020 demand-softening shock seemed to have suppressed private interest far more than the 2014 shock. That implies private markets saw less advantage to investments at the time. By contrast, after Russia began its full-scale invasion of Ukraine in 2022, investment slowly ticked up. That was likely inspired by the more attractive ROI from higher oil prices.

Looking Ahead

While the contribution level is more difficult to pin down after 2023 (the data becomes more unreliable given the short time horizon), we get some clues as to what investment trends may emerge in the wake of the current war in Iran.

Given this shock most clearly resembles the Ukraine war (lower supply, same demand), it seems likely that private markets will increase their interest in natural resource investment.

However, the main challenge is location. As the regional conflict has locked down efficient shipping in much of the Middle East—as well as insecurity right now in oil investment worldwide in regions such as South America—it will likely make new investment somewhat challenging. In addition, investment today will more likely focus on safer regions and possibly angle toward projects that enhance profitability without expanding production. Just as the elevated prices today take advantage of reduced supply.

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