Any hint of political uncertainty or risk in the world can often have some sort of impact on financial markets, especially if there is a crisis brewing where energy resources could be at threat.
The current geopolitical climate is certainly causing some investors to get nervous with topics like North Korea and what President Trump’s next move will be, both firmly on the radar of investors who want to know if they should take flight before things get worse.
Here is a look at how geopolitical volatility can impact on global energy markets and why the climate may not always be as gloomy as some people believe.
A need to know basis
If you are an energy investor why is it so important to know about geopolitical volatility and how it affects prices?
The basic answer to that question is that geopolitical volatility is widely perceived as the most unsettling and unpredictable factor for sending prices into a nosedive.
A military coup or some other major political event that could be detrimental to oil and gas supply lines is bound to have a profound impact on investors perception of how that could influence energy prices in the immediate and longer term.
It has even been suggested in some circles that conflict in the Middle East has the capacity to create a spike in crude oil prices of up to 30%, so it would seem that if you are an active energy investor you definitely need to have your finger on the pulse in terms of geopolitical events and what they mean to energy resources and supply lines.
Anyone interested in playing the energy markets can visit OilAndEnergyInvestor.com for advice and insights into how current events might be interpreted by markets.
Hitting the panic button
It is always worth remembering that most financial markets react in some way to geopolitical events and when news first breaks that could have a potentially detrimental impact on prices, there is often an immediate slide followed by a slight recovery, but not always.
This uncertainty spooks a lot of investors who might decide to rush for the exit before seeing how things play out, which could mean their losses increase.
This is the dilemma, do you stick or twist?
One example of how overreaction can be costly would be the situation that occurred in Libya about six years ago. Civil war broke out and the country’s oil production was curtailed, leading to uncertainty about how global oil reserves would be affected.
Saudi Arabia took up the slack and started supplying the European refineries, but it subsequently turned out that the quality of the Saudi’s crude was inferior to Libya and the refineries weren’t geared up to process the poorer grade crude.
As you might imagine, this chain of events saw prices fluctuate wildly as a result of investors trying to interpret the impact of future supply disruptions, creating short-term price shocks.
Hitting the panic button always has financial consequences, but the fundamental question that you need to try and get an answer to is overall, how well do stocks hold up in a geopolitical crisis.
Investors fear index
If there was such a thing it would be a very illuminating graph pattern that you could be viewing and you would almost certainly be able to mark out certain events on the charts when major events start to unfold, like increased tension with Russia and North Korea, for instance.
The French presidential elections are another recent example, where the prospect of a right-wing nationalist being elected put many investors on edge.
What you should take from all these scenarios is that stock markets have consistently proved to be far more resilient than first imagined even in the face of major global events like war, terrorism, and the violent removal of a head of state.
September 11 is a date that none of us will forget and stocks plummeted in the immediate aftermath of that horrendous attack, but those losses were recovered and the major U.S stock indexes had even risen beyond their level just before the attack, in a matter of three months after it happened.
All this seems to prove a point that investors initial fears are seldom fully realized to their full extent in the immediate aftermath of a major international event.
The same rules of engagement could be applied to global energy markets, where a steady nerve and a resistance to panic can often prove to be the way to hold onto your gains.
Lola Woodward is a stock market enthusiast who loves to share her insights online. You can find her articles on a variety of investing and personal finance websites.