Oil shocks and portfolio hedges

With contributions from Owi Ruivivar, Chief Portfolio Strategist; Eli Lee, Chief Investment Strategist; Mansoor Mohi-Uddin, Chief Macro Strategist; Low Pei Han, CFA, Head of Equity Strategy; Boh Hui Ling, CFA, CESGA, Head of Fixed Income Strategy; Neo Bee Leng, Senior Investment Strategist

• In light of current oil price rises, market outcomes will depend heavily on the prevailing macro environment – especially inflation levels and central bank policy – at the time of the shock.
• Previous oil supply disruptions primarily affected markets via higher energy prices, inflation pressures, and costs, rather than through sustained financial instability.
• Assets commonly viewed as “safe havens” show mixed and regime-dependent performance following oil shocks; bonds hedge growth shocks better than inflation shocks, currencies behave unevenly, and volatility spikes are typically short-lived. Real assets – especially oil and, to a lesser extent, gold – exhibit the most consistent positive response to supply-driven shocks, reflecting their direct linkage to the source of risk.
• Effective portfolio hedging requires moving beyond labels and focusing on instruments whose payoffs align directly with the dominant transmission channel of the shock, complemented by selective use of derivatives, alternatives, and quality tilts in equities and credit.

Limits of traditional hedges

Oil supply risk is now the centre of market attention. Disruptions to energy production and trade routes are already feeding into inflation and costs, with direct consequences for portfolios.

Oil supply shocks represent an exogenous type of market disruption that originate outside the financial system. Oil prices are transmitted directly through energy prices and costs, and impact depends on how these pressures interact with growth and policy.

This distinction matters for hedging portfolios. Assets commonly viewed as defensive may not provide uniform protection across different environments, and their effectiveness depends on the nature of the shock.

For portfolio construction, this raises two related questions: what characteristics define an effective hedge in this context, and which assets exhibit those characteristics in practice.

This paper by the CIO Investment Institute examines historical oil supply disruptions to address these questions, assessing how asset classes behave in this environment and implications for portfolio construction. This provides a framework for identifying suitable portfolio hedges in a volatile market environment while staying invested. In essence, maintaining a diversified portfolio remains a key priority for long-term portfolio resilience.

Oil shocks in historical context

We review a set of historical oil supply shocks, focusing on the nature of the disruption and the macroeconomic backdrop in each episode.

Oil markets have repeatedly served as the transmission channel through which geopolitical tensions affect the global economy. Production and transportation remain geographically concentrated, so disruptions in key regions can translate quickly into constraints on global supply and sharp movements in energy prices.

Over the past five decades, several such episodes have occurred, including the 1973 Arab oil embargo, the 1979 Iranian revolution, the 1990 Gulf War, the 2003 Iraq War, the 2011 Libyan civil war, the 2018 US sanctions on Iran, and the 2022 Russia–Ukraine war. While the geopolitical circumstances differ, each episode was characterised by a sudden or anticipated disruption to global oil supply.

While some events involved abrupt and large-scale supply disruptions, others unfolded gradually as uncertainty around production or transportation increased. In certain cases, spare capacity or alternative supply channels helped offset the initial shock, while in others, constraints persist for longer. The timing of the disruption relative to the economic cycle also varied, occurring in late-cycle environments or during periods of recovery.

The prevailing inflation and policy making backdrop varied across episodes. The oil shocks of the 1970s took place in an environment of already elevated inflation and less constrained policy, while later episodes unfolded in periods of lower inflation and more established monetary frameworks.

Exhibit 1 places these events in historical context, highlighting the evolution of oil prices alongside the major supply shock episodes. In many cases, prices begin to move ahead of the formal trigger as geopolitical tensions build, before stabilising or partially reversing as supply adjusts.

Exhibit 2 summarises the key characteristics of each episode, including the escalation phase, the geopolitical trigger, the nature of the market disruption, the scale of supply affected and the global economic backdrop at the time of the shock. The variation across these dimensions highlights the diversity of oil supply shocks in both magnitude and context.

The current Iran episode fits within this historical pattern. As in earlier cases, the escalation has centred on disruptions to energy infrastructure and trade routes, with the potential to constrain global supply. The backdrop remains one of persistent inflation pressures alongside slowing, but not yet contracting, global growth.

Exhibit 1: Oil prices and major supply shock episodes

Source: Bank of Singapore

Exhibit 2: Oil supply shocks - Event characteristics and market outcomes

Source: Bank of Singapore Note: Market disruption (t=0) denotes the month in which the supply shock became visible in oil prices. Returns show cumulative performance over the following 3 months.

Market behaviour around oil supply shocks

To examine how markets respond to oil supply disruptions, we analyse the behaviour of oil prices and equity markets in the 12 months before and after each of the seven episodes described above.

Exhibit 3 shows the evolution of oil prices around each episode, indexed to the month of the geopolitical trigger. Three features stand out.

(i)    Oil prices often begin to rise ahead of the formal event date. In many cases, geopolitical tensions build gradually, and markets incorporate the risk of supply disruption before the trigger occurs. This pattern is visible across several episodes and is reflected in the upward drift in the median price path prior to the shock.

(ii)   The magnitude of price movements varies across episodes. Some shocks result in sharp and immediate increases in oil prices, while others lead to more moderate or gradual rises. The scale of the response reflects both the size of the disruption and prevailing supply conditions.

(iii)  Oil prices often stabilise or partially reverse in the months following the initial shock. As the disruption becomes clearer and supply adjusts, markets reassess the balance between supply and demand.

Exhibit 4 compares these dynamics with the behaviour of equity markets. In contrast to oil prices, equity responses are more varied across episodes. In some cases, equities decline around the time of the shock, while in others the impact is more limited or short-lived. The median path suggests a modest decline around the event followed by a gradual recovery over time.

Taken together, these results highlight differences in how energy and equity markets respond to oil supply disruptions. Oil prices reflect the direct impact of changes in supply, while broader financial market responses vary across episodes.

Exhibit 3: Oil prices around oil supply shocks (t-12 to t+12)

Source: Bank of Singapore

Exhibit 4: Equity prices around oil supply shocks (t-12 to t+12)

Source: Bank of Singapore

Exhibit 5: Select asset class returns and VIX 12 months after oil supply shocks 

Source: Bank of Singapore

Performance of traditional hedge assets after oil supply shocks

The preceding analysis examines how oil prices and equity markets behaved around historical supply disruptions. A natural question for investors is whether assets traditionally viewed as portfolio hedges provided protection in the aftermath of these events.

To address this question, Exhibit 5 presents the results of a simple event study. For each asset class, we compute the return in the 12 months following each of the seven oil supply shocks identified earlier. The exhibit reports both the mean and median outcome across episodes, alongside unconditional returns over the full sample period. Considering both measures of central tendency is useful given the limited number of historical events and the potential for individual episodes to exert a disproportionate influence on the average.

The results reveal several clear patterns.

1. Equities tend to underperform their typical return profile following supply disruptions
   Across the seven episodes, the average equity return in the 12 months following the shock falls below the unconditional historical average for the S&P 500 Index. The median outcome is also weaker. This pattern is consistent with the economic effects of rising energy prices. Higher oil prices act as a tax on consumption and raise production costs for firms, weighing on growth expectations in the near term. While equities ultimately recover as economies adjust, the immediate environment following a supply shock is generally less supportive for risk assets.
   One dimension that further conditions equity outcomes is starting valuation (shown in last column of Exhibit 2). Across the historical episodes, oil shocks that occurred when equity valuations were already elevated tended to be associated with weaker or more fragile market performance. In contrast, shocks occurring when valuations were lower were more readily absorbed. This reflects the interaction between rising costs and valuation compression: when margins come under pressure in an already richly valued market, the scope for downside is amplified. When valuations are more moderate, equities are better positioned to absorb the shock.
2. Government bonds provide uneven protection
   Duration performs well in some episodes but poorly in others. The dispersion reflects the macroeconomic regime in which the shock occurs. When supply disruptions coincide with already elevated inflation – as in the Russia-Ukraine war that started in 2022 – bond returns tend to be weak as yields rise alongside inflation expectations. In lower-inflation environments, bonds perform better as growth expectations soften and monetary policy eventually responds. Historically, government bonds have therefore hedged growth shocks more reliably than inflation shocks, limiting their consistency as protection against energy-driven disruptions.
   
   
3. Safe haven currencies exhibit mixed outcomes
   Currencies, commonly viewed as defensive, do not display a uniform response across the episodes. The USD strengthens in some cases as global financial conditions tighten, and investors seek dollar liquidity. The JPY, often characterised as a safe haven currency, shows considerable variation across the sample. For Asian investors, the SGD tends to remain relatively stable, reflecting Singapore’s strong external balance and credible policy framework, though stability alone does not imply strong hedge properties.
   
   
4. Real assets (such as commodities) show the clearest positive response
   Oil itself unsurprisingly performs strongly following supply disruptions. Gold also tends to generate positive returns across many of the episodes. A notable feature of the distribution is the gap between the mean and median outcomes. In several cases, large upside moves drive the average higher even though typical outcomes are more modest. This pattern suggests a degree of convexity in the return distribution, with gold delivering its strongest performance during the more severe geopolitical episodes.
   
   
5. Implied volatility provides only short-lived protection
   Measures of equity market volatility such as the VIX, which tracks the 30-day volatility for the S&P 500 Index, tend to spike around the geopolitical trigger but do not remain elevated over the 12-month horizon examined in this analysis. In several historical episodes, volatility rose sharply at the onset of the event before reverting as markets adjusted to the new price environment. This behaviour reflects the nature of oil supply disruptions. Unlike financial crises, which originate within the financial system and generate sustained market stress, energy shocks propagate primarily through inflation and cost pressures. As a result, volatility spikes tend to be temporary rather than persistent.
   
   In total, these results highlight an important feature of hedge construction. Assets commonly described as defensive (e.g., bonds, some currencies) do not provide protection in a uniform way. Their effectiveness depends on the economic channel through which the shock spreads.
   
   Oil supply disruptions operate primarily through energy prices and inflation dynamics. Assets directly linked to these forces – such as energy itself and, to a lesser extent, gold – tend to respond most clearly. In contrast, financial hedges such as government bonds and currencies depend on the broader macroeconomic adjustment that follows the shock, resulting in more variable outcomes.

Characteristics of effective hedges

For portfolio construction, we cannot presume the effectiveness of hedges based on conventional labels such as “safe haven” status. Instead, effective hedges tend to be those whose payoff is directly linked to the source of the disruption. In other words, hedges that respond directly to the source of the disruption tend to perform more reliably than those that depend on secondary financial market dynamics.
From a whole portfolio perspective, a hedge candidate should provide reliable downside protection during tail risk events. Ideally, portfolio hedges should exhibit low or negative correlation to core exposures, helping to reduce overall portfolio volatility and concentration risk. In addition to these diversification benefits, suitable hedges should have strong liquidity characteristics, transparent risk drivers, and cost efficiency to ensure they are implementable. 
Furthermore, their characteristics should demonstrate robustness across varying market regimes. Ultimately, it should strengthen portfolio resilience, limit drawdown severity during periods of stress and enhance risk-adjusted returns while preserving long-term capital compounding.
 

Candidates for a portfolio hedge

The historical evidence provides a useful guide, but the question is how to translate it into portfolio construction.

In practice, this means identifying where protection is reliable, where it is conditional on the macro environment, and how different exposures interact when oil-driven shocks unfold.

The discussion below applies these insights across fixed income, equities, currencies and alternatives, with a focus on how they can be combined to improve portfolio resilience.

Equities 
Equity performance following oil supply shocks is uneven but can be improved through sector allocation and quality tilts.

Across the historical episodes examined, US large cap stocks have generally outperformed US small caps, Europe, Japan, and Emerging Markets (EM) equities.

At the sector level, the dispersion is pronounced. Energy stocks, especially of upstream producers, have unsurprisingly outperformed, while materials performed relatively well, particularly within EM equities. By contrast, sectors with greater sensitivity to consumer demand or input costs, such as financials and consumer discretionary have tended to lag in the US, while industrials and consumer discretionary in EM. These sectors contain the industry groups of retailing, transport and autos. In a risk-off environment, investors also tend to gravitate to more defensive sectors such as utilities, consumer staples and healthcare which generally have a lower beta and more stable earnings profiles.

When oil shocks persist and energy prices remain elevated, the importance of quality becomes more pronounced. Higher energy costs feed through into broader inflation pressures and slower growth, creating a more challenging operating environment. Companies with strong balance sheets, pricing power and the ability to self-fund operations are better positioned to absorb these pressures.

Characteristics such as sustainable competitive advantages, pricing power (ability to pass on inflationary costs), strong financial health (able to self-fund operations when external financing becomes expensive, or even undertake acquisitions), resilient earnings, and strong free cashflows, help mitigate volatility and support performance during periods of stress. Importantly, such companies are not confined to traditional defensive sectors but can be identified across the equity universe through a focus on fundamentals.
More broadly, the current environment also reinforces a structural shift toward sectors linked to security and resilience, including energy, minerals, defence, food and infrastructure. In these areas, long-term contracts (often with government counterparties) support demand even as broader economic conditions weaken.

Fixed Income
Fixed income provides conditional protection, with outcomes largely determined by the inflation or growth dynamics associated with the oil shock.

During oil shocks, risk aversion rises and capital shifts toward higher-quality assets. Dispersion increases, with High Yield (HY) rated bonds experiencing more significant spread widening compared to Investment Grade (IG) bonds. Issuers with weaker fundamentals and greater dependence on external financing are likely to see larger spread widening as geopolitical risk premia rise. Maintaining a focus on high-quality, defensive credits helps mitigate downside risk in this environment.

Government bonds provide uneven protection. As noted earlier, they have historically been more effective at hedging against growth shocks than inflation shocks, which limits their reliability as a safeguard during energy-driven disruptions. In such situations, Treasury Inflation-Protected Securities (TIPS) tend to provide better protection against rising inflation compared to regular Treasury bonds.

During the current oil shock, the UST yield curve has bear-flattened month-to-date (MTD) as markets have lowered expectations for Federal Reserve (Fed) rate cuts amid concerns about potentially higher inflation. This has resulted in TIPS outperforming USTs MTD.

When inflation concerns outweigh growth worries, longer-duration assets generally underperform. Therefore, positioning portfolios in the short end of the yield curve typically offers better protection at the onset of oil shocks.

At the same time, extended energy disruptions raise the risks of stagflation, higher unemployment and sluggish economic growth. This may eventually lead the Fed to switch its focus and ease policy at a later stage. Reflecting these opposing forces, we remain Neutral on duration at the portfolio level.

At the sector level, defensive sectors such as telecom and consumer staples as well as energy geared sectors such as upstream oil & gas, commodity players and energy exporters, tend to be more resilient. In contrast, energy importers, downstream refiners, petrochemicals as well as cyclical sectors – such as ports, real estate, shipping, airlines, autos and consumer discretionary – are more likely to be negatively impacted.

As for utilities, the impact largely depends on how quickly higher fuel costs can be passed on to consumers. In some countries, particularly EMs, price controls may be in place to mitigate the inflationary effects on the broader economy.

Even among those who benefit, gains are unlikely to be uniform. For instance, in the upstream segment, factors such as whether sales volumes are priced at fixed rates or spot prices, the location of assets and the extent of oil production hedging will influence how much advantage a producer would be able to realise.

For bond prices, market technicals, risk sentiment, and interest rate fluctuations will all impact the total returns for investors. Clearly, the recent positive correlation between oil prices and rate volatility is expected to further complicate credit markets, leading to higher risk premiums and increased spread volatility.

Currencies and Gold
Traditionally, the USD, JPY and CHF have been favoured by investors – with the SGD a more recent alternative – when looking to currencies to hedge portfolios during times of risk aversion. The USD benefits from safe haven-seeking inflows into UST while the JPY, CHF and SGD benefit from Japan’s, Switzerland’s and Singapore’s large current account surpluses. The latter drive exchange rates higher during times of risk aversion when investors become fearful and capital account flows dry up.

But as the historical track record given in the first section of this paper shows, the performance of each safe haven currency has varied during the different oil shocks seen since the early 1970s.

In the current oil shock, following the joint US-Israeli attacks on Iran from 28 February, the USD has so far been the stand-out currency; appreciating against the JPY, CHF, SGD and even gold during the conflict.

The greenback has strengthened for two reasons. First, the US has become relatively self-sufficient in energy production over the last decade due to the shale oil revolution. In contrast, Europe and Asian countries remain significant net oil and gas importers. Thus, higher energy prices benefit US producers while hurting energy-importing economies in the rest of the world. Second, the risk that surging oil prices cause inflation to rise again in 2026 has made it less likely the Fed will cut interest rates further over the next few months. 
By comparison, the JPY has weakened close to four-decade lows against the USD around 159, the CHF and SGD have dipped towards 0.79 and 1.28 versus the greenback and gold, a zero-yielding asset, is trading near USD5,000/oz having hit new all-time highs of USD5,600/oz earlier this year.

But while the JPY may continue to be undermined by surging oil prices, we think the current strength of the USD is likely to be fleeting and therefore would favour the CHF, SGD and gold as longer-term safe haven hedges.

In particular, if the war in the Persian Gulf lasts beyond a few weeks and oil prices exceeding USD100/bbl cause the major economies to suffer stagflation and rising unemployment then the Fed is likely to switch from focusing on inflation in the next few months to cutting interest rates instead to ward off recession.
In addition, the Trump administration’s volatile policies are likely to spur global investors to keep diversifying their portfolios away from US markets over the next few years. Such diversification helped push the USD down 10% against a range of currencies in 2025 and we expect similar declines are likely each year if the Trump administration continues to shock financial markets.

Investors could consider CHF, SGD and gold as safe haven assets to hedge their portfolios during the current oil shock despite the greenback’s initial strength at the start of the war.

Liquid Macro Hedge funds, Derivatives, Structured Products
The current backdrop with heightened uncertainty over the length and intensity of the impact of the conflict and still-elevated positioning have increased the relevance of portfolio overlays to enhance the resilience of outcomes for investors. These range from liquid macro hedging instruments, options and derivatives and structured products with varied underlying assets and payoffs.

Investors must bear in mind that the objective of leaning into these instruments and additional investments during a period of significant uncertainty is not to eliminate risks entirely, but to reshape the portfolio outcomes by limiting drawdowns and retaining upside participation when the market recovers, which help investors to stay invested in core holdings or portfolios through market gyrations. This is a key feature of the type of portfolio decisions taken by professional hedge funds on a constant basis.  

Hedges and derivatives entail premium outlays i.e. costs at the onset, hence considerations such as sizing and the time horizon for the hedges are key implementation decisions. Investors can combine hedges that involve payment of put premiums or selected structured product payoffs, e.g. yield enhancement structures or income strategies, to reduce the overall costs of protection as described in Exhibit 6.

Exhibit 6: Combining macro hedges, derivatives and structured products as portfolio overlays to augment the payoff profile of the whole portfolio (subject to client suitability and risk appetite)

Source: Bank of Singapore

Exhibit 7: Alternatives demonstrated significant portfolio stabilisation during 2022-2023

Source: Preqin, Bloomberg, Bank of Singapore

Alternatives

Alternatives provide a more structural form of diversification, with return drivers with lower correlation to traditional equity and duration exposures. In the context of oil supply shocks, their effectiveness depends on their sensitivity to inflation, rates and macro dispersion.

With the potential risks of a more stagflationary backdrop and tighter financial conditions, selected alternative investments can play the role of a more sustainable stabilising force within portfolios. This includes hedge funds, real assets and selective exposures in private credit. While the market dynamics differed in the last inflation shock over 2022-2023, infrastructure, private credit and hedge funds were the clear relative winners.

1. Hedge funds
   As outlined in the section on liquid macro hedges and derivatives, hedge funds are one of the asset classes where hedging and investing in derivatives is a core activity, making hedge funds a type of macro hedge as well. Sub-strategies that perform well and offer the much-needed source of uncorrelated returns during periods of high macro uncertainty are macro discretionary funds, and more market neutral strategies like relative value funds. 
   
   
2. Real assets
   Real assets cover a broad range of real estate (residential, commercial, and industrial) and infrastructure exposures, and can cover both the equity and debt spectrum, including asset-backed finance. Real assets play a crucial role where inflation risks are skewed to the upside given the exposure to inflation-adjusted cashflows, regulated or contracted income which can be a valuable source of stable income during periods of weak economic activities and general asset price inflation. 
   
   
3. Private credit
   Against the uncertainty over macro outcomes and the subsequent impact on interest rates, managing interest rates and duration risks will be key for investors with a greater focus on fixed income. As private credit are mainly floating rate loans, they are a source of low or no duration and can add the diversification of fixed income portfolios. Given the recent concerns and the potential risks associated with the credit cycle, investors can take a more selective approach and also pace into the asset class when a reset in interest rates become clearer. Investors should bear in mind the long-term nature of alternatives exposures and the potential illiquidity of the Alternatives asset class. 

Conclusion

Oil supply shocks are not typical market disruptions. They transmit primarily through energy prices, inflation and costs, and their impact on portfolios depends on how these forces interact with growth and policy. The starting valuations of the equity market also matter. When valuations are elevated, the sensitivity to an inflation-driven shock increases, reinforcing the case for external hedges. When valuations are more moderate, equities themselves provide greater resilience.

The evidence shows that no single asset provides consistent protection: the following Exhibit 8 summarises conclusions from the paper. Real assets (including gold and oil) respond most directly to the shock, while fixed income, currencies and equities offer more conditional protection depending on the macro environment.

The current environment shares several features with past oil supply shocks, including upward pressure on energy prices and inflation alongside a gradual slowdown in growth; equity valuations are demanding. In this context, assets directly linked to the disruption, such as energy and, to a lesser extent, gold, are more likely to provide effective protection.

By contrast, the role of traditional hedges remains conditional. Nominal duration is less effective in the early phase of the shock, while inflation-linked instruments provide more direct exposure to rising prices. Within risk assets, resilience depends on sector and quality, with energy-linked and defensive segments better positioned. Currency behaviour remains dependent on policy and external balances, with recent USD strength reflecting near-term dynamics rather than a stable hedge profile.

These considerations suggest a more selective approach to hedging, combining exposures that address both the immediate inflation impulse and the evolving growth outlook.

Exhibit 8: Performance of asset classes after oil supply shocks

Source: Bank of Singapore