For decades, investors have treated geopolitical disruption in oil markets as a warning signal for the global economy. A conflict in the Middle East, a threatened shipping route or a sudden spike in crude prices would typically prompt fears of surging inflation, collapsing growth and aggressive central bank responses.
Yet recent market behaviour suggests something has changed. Even significant disruptions to global oil supply have generated surprisingly muted reactions across equities, bond markets and inflation expectations.
Our explanation for the modest reaction has two halves. The calm was partly earned, as the world economy is far less oil dependent than it was in the 1970s. This means a shock of this size hurts less than it once would have.
But the calm was also partly borrowed, as much of the disruption was absorbed by drawing down inventories. This cannot be repeated indefinitely.
The long-term change in the structure of the global economy since the oil crises of the 1970s, reflects advanced economies that have become steadily less energy intensive.
Improvements in efficiency, technological change and the growth of service sectors mean that each unit of economic output now requires significantly less oil than it did several decades ago.
This changes the way economists think about energy shocks. A disruption that removes millions of barrels of supply may sound dramatic, but what ultimately matters is the economic burden imposed on consumers and businesses.
If energy accounts for a smaller share of national income, then even sizeable increases in oil prices translate into a much smaller drag on economic activity than in previous decades.
For investors, this helps explain why financial markets have become less sensitive to geopolitical headlines than historical experience might suggest. The relationship between oil prices and recessions has weakened because the underlying dependence of developed economies on oil has also declined.
Why inventories matter
However, concluding that oil no longer matters would be a mistake. Financial markets remained calm during this episode as the severe physical supply disruption was mitigated by inventory drawdowns.
Commercial inventories, strategic petroleum reserves and oil held in transit effectively provided the market with a temporary buffer against supply disruptions. Rather than immediately forcing consumers to reduce demand, the inventory drawdown has allowed the market to smooth the adjustment over time.
This distinction matters because inventories do not eliminate shortages, they merely postpone the economic adjustment.
When inventories are drawn, prices are often lower than they would otherwise have been because stored barrels temporarily supplement current production. Financial markets can therefore underestimate the underlying tightness in physical supply, particularly when futures prices imply that disruptions will prove temporary.
Eventually these inventories must be rebuilt. This creates an important asymmetry that investors sometimes overlook. Drawing inventories reduces effective demand for current production, helping contain prices.
Rebuilding inventories has the opposite effect. It creates additional demand even after the original supply disruption has eased, supporting prices for longer than conventional forecasts might imply.
In other words, inventories do not remove the cost of a supply shock, they simply shift part of that cost into the future.
When physical and financial markets diverge
This mechanism also helps explain why physical and financial oil markets can send apparently contradictory signals. Futures markets naturally focus on expectations for future supply and demand. Physical markets, by contrast, reflect the immediate availability of barrels.
Periods in which physical oil trades at a substantial premium to futures prices are often a sign that inventories are absorbing stress within the system. The futures curve may correctly anticipate that disruption will eventually ease while simultaneously understating the extent of current physical scarcity.
For portfolio managers, this distinction is increasingly important because the market's initial reaction to geopolitical events may only tell part of the story.
What investors should watch
Perhaps the most enduring lesson from 2026 is that investors should pay less attention to the size of an oil supply disruption measured in barrels and more attention to the mechanisms through which markets absorb it.
The availability of inventories, the behaviour of physical markets, the shape of the futures curve and the economy's overall energy intensity together provide a better guide to macroeconomic outcomes than the headline oil price alone.
For long-term investors, this offers a more nuanced framework for interpreting geopolitical risk. Modern economies have become substantially more resilient to energy shocks than those of previous generations, reducing the probability that every disruption becomes a macroeconomic crisis.
That resilience, however, should not be confused with immunity. Inventory buffers are finite, precautionary stock building can sustain prices long after a disruption ends, and periods of apparent market calm may simply reflect an adjustment that has been deferred rather than avoided.
The next geopolitical shock is unlikely to resemble the oil crises of the past. But understanding how today's oil market absorbs disruption remains essential for investors seeking to distinguish between genuine systemic risks and temporary market noise.
Gavyn Davies is chairman of Fulcrum Asset Management. Dan Wales is an economist. The views expressed above should not be taken as investment advice.