Oil Price Volatility: What It Means for Global Markets and Investors
By Boring Money
8 July, 2025
A lot of geopolitical events create more heat than light. They deliver volatility and noise, but in the end have little impact on economic growth, and even less on the day-to-day running of companies. The exception is where geopolitics intersect with oil. The price of oil can have a significant impact on certain industries and certain companies - and therefore matters to investors.
Despite this, it was easy to dismiss the US’s recent military intervention in Iran as just more noise from the ever-volatile Middle East. Yet in the immediate aftermath, the oil price spiked higher, giving a taste of how a broader and more enduring Middle East conflict could affect the market. With an apparent resolution for the time being, the price of oil has since come back down, but tensions could flare again.
Who is hurt most by a higher oil price? The world is not as sensitive as it once was to the cost of oil. Prices used to be able to make or break economic growth, but central bank independence, better-managed Term used to describe how quickly the prices of goods and services is rising over a period of time. In periods of high inflation, prices are increasing rapidly, whereas low inflation means prices are increasing by only a small amount. expectations, and the growth of renewables have reduced dependency on oil steadily over the years. The war in Ukraine has also accelerated efforts to The process of spreading your investment portfolio across different asset classes, such as partially in shares and partially in bonds, in order to reduce risk. energy generation.
Country and sector vulnerability
Nevertheless, there are a range of oil-dependent industries - airlines, automotive and shipping companies, for example. While many will carefully manage their The proportion of a fund or portfolio invested in a sector, asset class or region, usually expressed as a percentage of the overall portfolio. For example, a fund with 75% exposure to China would have 75% of its assets invested in products related to or in China. to the oil price (through An investment strategy which aims to protect against risk or financial loss from adverse price movements. For example, by using a derivative contract to agree to sell if the share price of an investment falls below a certain level - therefore limiting potential losses. , for example) they are vulnerable to long-term spikes. Specific countries will also be more vulnerable.
Countries with large current account deficits and a high oil dependency are the most vulnerable to higher oil prices. While Korea, Taiwan, Thailand and Vietnam have high oil dependence, they have enough current account surplus buffer to sustain an increase in oil price that is not as extreme as in 2022. The Philippines and India look most vulnerable once we take into account both oil dependency and today’s current account position.
Inflationary pressures
Investors also need to consider the secondary effects of a high oil price and in particular, its impact on inflation.
As a rule of thumb, J. Safra Sarasin Sustainable estimates that a 10% rise in the oil price typically lifts headline inflation by about 0.4 percentage points after a few months. Short-term spikes are an annoyance, but are unlikely to change interest rate policy. More sustained rises could be important, however.
Higher oil prices and the associated rise in CPI inflation would provide central banks with a major headache. If the oil price climbed to $130 a barrel as a result of the closure of the Strait of Hormuz, we estimate US CPI inflation could peak at almost 6%. And in the Eurozone, inflation could reach almost double the ECB's target.
In its most pessimistic scenario for the oil price, Oxford Economics estimates that world GDP would be about 0.3% below its current central prediction for 2026. This would reduce GDP growth by a 0.1 percentage point in 2025 and in 2026. The hit to activity would be slightly larger for the US and Eurozone - GDP growth at 0.4% and 0.5% below its central scenario next year, respectively.
That would stall central banks’ ability to drop interest rates. However, it’s worth noting that the oil price is nowhere near those levels at the moment. At the time of writing, the Brent oil price is around $66 per barrel, up from a low of around $56 per barrel in April.[1] Oxford Economics expects Brent crude to hover around the $63-$64 per barrel for the remainder of the year. The Schroders multi-asset team agrees:
Oil prices have gone up recently because of geopolitical concerns and are likely to remain at current levels while this uncertainty persists. However, we expect incoming supply to eventually outweigh demand, and once the current uncertainty fades, we expect prices to come down again.
Protecting against oil price spikes
If investors are worried about higher oil prices, there are ways to take protection in a portfolio. David Coombs, head of multi-asset investments at Rathbones, says he holds a long-term strategic allocation to oil because it is a good way to hedge against geopolitical risk. He says that it is one of the few ways to protect a portfolio against volatility in the Middle East in particular.
If they take this route, investors have a range of options. They can invest directly in the Oil majors are the world's largest oil and gas companies. They are also called supermajors or Big Oil. These companies operate globally across the entire oil and gas industry, from finding and extracting oil and gas, to transporting and storing it, to refining it into products like gasoline and selling those products to consumers., such as Total, Chevron or Shell. This will give exposure to the oil price, but also the idiosyncratic fortunes of the individual companies. For closer exposure to the oil price, investors will need to look at an ETF such as the WisdomTree Brent Crude Oil ETF, which tracks oil futures.
There are also a range of specialistRun by a professional or group of experts, usually called portfolio managers or fund managers, who make decisions about what to buy to try and outperform the market for their customers. funds. These will tend to be more diversified, but will offer some oil exposure. The BlackRock Energy and Resources Income Trust, for example, invests a significant share of its assets in oil and gas companies, while also investing in renewable energy and mining companies. CQS Natural Resources Growth and Income is another option.
Oil prices still matter, even if its impact on global economic growth and inflation has diminished somewhat in recent years. The Middle East may be heading into another period of prolonged volatility, but there are actions investors can take to protect themselves.
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