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Jean-Maurice Ladure

Jean-Maurice Ladure

Executive Director, MSCI Research

Ashish Lodh

Ashish Lodh

Executive Director, MSCI Research

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Which Factors Rose with the Price of Oil?

  • Historically, oil-price increases have been mostly demand-led and benefited cyclical sectors such as energy and materials and cyclical factors such as value and size.
  • When oil prices have spiked due to supply shocks, they've usually been accompanied by market volatility. Defensive sectors such as utilities, and defensive factors such as quality have performed well.
  • Net exporters of oil and gas in developed markets (e.g., Norway, Canada) have largely outperformed the net importers (e.g., U.S., Japan) in periods when the price of oil was rising.

The war in Ukraine has pushed crude oil prices significantly higher, as of the beginning of March — when it was more than four times higher than the bottom hit in March 2020. Two key questions on investors’ minds are: What is my portfolio’s exposure to oil? And how could rising oil prices affect my portfolio’s performance? In this blog post, we draw on more than 45 years of historical data to gain insights into oil-price sensitivity across sectors, countries and style factors.


Crude-oil price and the equity market's long-term performance

MSCI World Index in gross USD. Period from Nov. 28, 1975, to March 7, 2022.


Sectors beyond energy benefited when oil prices rose

Unsurprisingly, the energy sector has had the strongest positive relationship with the price of oil. On average, the sector has outperformed the MSCI World Index by 2.98% per month in the periods with sharp oil-price increases (i.e., the top quartile of monthly oil-price returns) from November 1975 to February 2022. Materials and information technology were the only other sectors that benefited during these periods, while consumer staples, utilities and health care had the worst performance.


Rising oil prices have tended to lift cyclical sectors

Monthly excess returns vs. the MSCI World Index in gross USD from November 1975 to February 2022.

In general, cyclical sectors have outperformed and defensive sectors underperformed during sharp oil-price-rise regimes. This has been the case primarily because numerous oil bull cycles have coincided with a growing economy, where oil prices were fueled by rising demand. Cyclical sectors have historically benefited from periods of economic growth.

Some oil spikes, however, were driven by geopolitical supply shocks (such as the Gulf War in 1990), which have tended to be accompanied by equity-market volatility and correction. Those periods were short-lived and relatively rare, however. In those periods (19 months in aggregate),1 some defensive sectors such as utilities outperformed, while cyclicals such as financials and consumer discretionary underperformed, as seen in the exhibit above.


Oil dependency impacted equity performance in developed markets

In periods of significant rising oil prices, the relationship in developed markets between net oil and gas exports (production minus consumption) and equity-market performance was strongly positive from November 1975 to February 2022. Oil and gas producers, and commodity-producing countries in general, such as Norway, Australia and Canada, have historically benefited from oil-price spikes. Norway, in particular, has outperformed the broad developed markets by 3.08%, on average per month.

At the other end of the spectrum, Japan is one of the largest importers of oil and gas in the developed world, and Switzerland has no domestic oil production, relying on imports to meet its energy needs. Both countries have historically underperformed during rising-oil-price regimes.

The U.S. presents a special case. The country historically was a net importer of oil and gas until as recently as 2019. Net-importer status, combined with the inverse relationship between oil and the U.S. dollar, has resulted in a drag on U.S. equities (-0.37%) during periods of significant oil-price rises from November 1975 to February 2022.


Oil-producing developed markets outperformed when oil-prices rises

X-axis: Monthly excess returns vs. the MSCI World Index in gross USD for the top 25% of months with oil-price increases from November 1975 to February 2022. Y-axis: Net oil and gas exports (production minus consumption) in exajoules per year normalized by GDP in USD, averaged over the period 1975 to 2020. Norway and Singapore were outliers and therefore are not plotted to scale. Their co-ordinates are reported in the labels by country name.


Style factors followed industry and country performance patterns

Style-factor indexes may have also depended on oil prices through their implicit industry and country exposures. The exhibit below shows that, like sectors, the performance of style-factor indexes was guided by the respective defensive or cyclical nature of specific factors. The cyclical factors, such as value and size, were positively correlated sharp with oil-price rises. Defensive factors such as minimum volatility, dividend yield and quality, on the other hand, have performed relatively poorly when oil prices were rising sharply. 

That said, during geopolitically ignited supply shocks such as the Iran-Iraq, Gulf and Iraq wars (19 months in aggregate), some defensive factors performed much better than they did during periods of demand-led oil-price increases. These defensive factors included quality (+0.77%) and minimum volatility (+0.08%). This could be due to the fact that oil-supply shocks arising from geopolitical events have been accompanied by volatile and falling equity markets, which have historically favored defensive style factors.


Defensive factors have outperformed during geopolitics-led oil-price shocks

Monthly excess returns vs. the MSCI World Index in gross USD.

While the recent oil-price spike has more in common with other geopolitics-led history, it can be useful for investors to keep the complete history in mind, when considering how to allocate or reallocate portfolios around industries, countries and style factors.



1The 19 months account for all supply-shock months including the Iranian Revolution (1979 to 1980), the Iran-Iraq War (at the end of ‘80), the Gulf War (August to September 1990), unrest in Venezuela (the end of 2002) and the supply shock of 2007 to 2008.



Further Reading

Russia – Ukraine War

Globalization Gets Another Jolt

Hotter Inflation Set Some Styles and Sectors on Fire