Markets in a Minute
Visualizing Historical Oil Prices (1968-2022)
This infographic is available as a poster.
This infographic is available as a poster.
Historical Oil Prices (1968-2022)
Amid Russia’s invasion of Ukraine, the inflation-adjusted price of oil reached a seven-year high. Russia is one of the world’s largest producers of crude oil, and many countries have announced a ban on Russian oil imports amid the war. This has led to supply uncertainties and, therefore, rising prices.
How does the price increase compare to previous political and economic events? In this Markets in a Minute from New York Life Investments, we look at historical oil prices since 1968.
The Fundamentals Behind Oil Prices
Before diving into the data, it’s worth explaining why historical oil prices have seen so much volatility. This mainly stems from the fact that the supply and demand of oil tends to have a low responsiveness to price changes in the short term.
- On the supply side, oil production capacity can be challenging to change quickly. Drilling a new oil well is a lengthy and complex process.
- On the demand side, it can be quite difficult to change equipment that uses petroleum products. For instance, in the short term, people will keep driving their cars to work despite higher gas prices.
For these reasons, in order to re-balance supply and demand, it takes a sufficiently large price change to occur. For example, if gas prices were to double, only then may enough commuters consider taking public transit or changing behavior in other ways.
What kind of events can shock the system enough to drive big price changes?
A large portion of the world’s oil is located in regions that are prone to political conflict. Political events can disrupt the actual or perceived supply of oil, and drive prices upwards. On the other hand, an economic downturn reduces energy demand and can depress prices.
Looking Back at Historical Oil Prices
To compare how events have influenced historical oil prices, we used data from the U.S. Energy Information Administration. It should be noted that the data extends to March 31, 2022, and does not reflect the recent price dips in response to Shanghai lockdowns and U.S. rate hikes.
Here is the inflation-adjusted price of a barrel of crude oil during select events.
| Date | Event | Crude Oil Price per Barrel Real 2010 Dollars |
|---|---|---|
| Q1 1971 | U.S. spare capacity exhausted | $13.47 |
| Q1 1973 | Arab Oil Embargo | $15.90 |
| Q1 1974 | Embargo lifted | $42.00 |
| Q1 1978 | Iranian Revolution | $39.65 |
| Q3 1980 | Official start of Iran-Iraq war | $76.93 |
| Q1 1986 | Saudis abandon swing producer role | $32.90 |
| Q2 1990 | Trough price prior to Iraq's invasion of Kuwait | $26.72 |
| Q3 1990 | Iraq invades Kuwait | $39.37 |
| Q4 1990 | Peak price during invasion | $47.15 |
| Q2 1991 | Iraq accepts UN resolution to end conflict | $30.18 |
| Q4 1996 | Peak price prior to Asian financial crisis | $31.88 |
| Q3 1997 | Asian financial crisis begins | $25.35 |
| Q1 1999 | OPEC cuts production target by 1.7M b/d | $16.41 |
| Q4 2000 | Peak price prior to 9/11 | $38.73 |
| Q3 2001 | 9/11 attacks | $31.76 |
| Q4 2001 | Trough price after 9/11 | $24.22 |
| Q1 2005 | Low spare capacity | $54.71 |
| Q2 2008 | Peak price before global financial collapse | $125.21 |
| Q1 2009 | OPEC cuts production targets by 4.2M b/d | $42.89 |
| Q2 2014 | Peak price prior to supply gut price collapse | $95.07 |
| Q1 2015 | OPEC production quota unchanged despite low prices | $44.41 |
| Q4 2019 | Price immediately prior to global pandemic | $50.38 |
| Q1 2020 | COVID-19 declared a pandemic | $40.34 |
| Q2 2020 | Trough price during global pandemic | $24.65 |
| Q1 2022 | Russia invades Ukraine | $77.94 |
From the first quarter of 1968 until the second quarter of 1986, data reflects the reporter refiner acquisition cost. From the third quarter of 1986 to the first quarter of 2022, data reflects the West Texas Intermediate cost.
In 1973, the Organization of the Petroleum Exporting Countries (OPEC) announced an embargo (ban) on oil exports to the United States. The move was in response to the U.S. providing military aid to Israel. By the time the embargo ended in March 1974, the inflation-adjusted price of crude oil had risen 164%. The embargo also led to a selloff in the stock market, with the recovery taking almost six years.
Historical oil prices rose rapidly from 2004-2008. During that time, economic growth was fueling oil demand but there was little spare production capacity. By the second quarter of 2008, inflation-adjusted oil prices hit a high of $125 per barrel. They crashed by 66% shortly thereafter due to the global financial crisis.
Most recently, the COVID-19 pandemic and associated containment measures caused historical oil prices to drop by nearly 40% in three months. Oil prices have since risen 216% from their pandemic low, as of the first quarter of 2022. This is due to the economic recovery and Russia’s invasion of Ukraine.
Oil as an Investment
Investors’ interest in oil as an alternative investment has risen in recent years. Given the high volatility in historical oil prices, investors may want to consider their comfort with this level of risk. Of course, an investor’s sustainability goals may also be a factor when choosing whether to invest in oil.
However, oil also presents opportunities. It has had low-to-negative correlation with U.S. bonds in recent years and may help investors diversify their portfolios. Not only that, it may help investors manage rising interest rates. An economic recovery typically leads to rising interest rates, but also more energy demand. Oil prices have historically climbed during these periods.
Markets in a Minute
Identifying Trends With the Relative Strength Index
When is the S&P 500 Index considered overbought or oversold? The relative strength index may offer some answers to identifying market trends.
This infographic is available as a poster.
Identifying Market Trends: The Relative Strength Index
What happens when the S&P 500 Index enters oversold territory? Does the market reverse, or continue on this trend?
A widely-used momentum indicator, the relative strength index (RSI) may offer some insight. The RSI is an indicator that may show when a stock or index is overbought or oversold during a specific period of time, indicating a potential buying opportunity.
This Markets in a Minute from New York Life Investments looks at the RSI of the S&P 500 Index over the last three decades to show how the market performed after different periods of overbought or oversold conditions
What is the Relative Strength Index?
The RSI measures the scale of price movements of a stock or index. In short, the RSI is used to calculate the average gains of a stock divided by the average losses over a certain time period. These are then tracked across a scale of 0 to 100. Broadly speaking, a stock is considered overbought if it reads 70 or above and it is considered oversold if it is 30 or below.
For example, when the S&P 500 Index has a RSI of 85, an investor may consider it overbought and sell their shares. Conversely, if the RSI hits 25, an investor may buy the S&P 500 thinking the market will bounce back.
The RSI is often used with other indicators to identify market trends.
The Relative Strength Index and S&P 500 Returns
Below, we show the 12-month returns of the S&P 500 Index after key ‘overbought’ or ‘oversold’ conditions in the market as indicated by the RSI:
| Date | RSI | Shiller PE Ratio* | S&P 500 Index 12-Month Return |
|---|---|---|---|
| Jul 15 2002 | 20 | 23 | 9.4% |
| Dec 4 2006 | 73 | 27 | 4.5% |
| Oct 13 2008 | 15 | 16 | 7.3% |
| Feb 7 2011 | 75 | 23 | 1.9% |
| May 13 2013 | 75 | 23 | 16.1% |
| Jan 8 2018 | 89 | 33 | -7.2% |
| Mar 16 2020 | 22 | 25 | 66.3% |
| May 3 2021 | 72 | 37 | 0.0% |
*Measured by the average inflation-adjusted earnings of the S&P over 10 years
As the above table shows, following each period of extremely oversold territory in the RSI, the S&P 500 Index had positive returns.
In fact, the S&P 500 Index had the strongest one-year returns following the COVID-19 crisis of March 2020, with over 66% 12-month returns. During the time of extreme fear, the RSI sank to deeply oversold territory before sharply rebounding.
Interestingly, following periods of extremely overbought conditions in the market there was a range of positive and negative performance. Most recently, before the peak of the last cycle in 2021, the S&P 500 Index spent roughly 9 months in ‘overbought’ territory before declining into 2022.
The Relative Strength Index in 2022
With the economy in uncertain territory, how does the RSI look today?
In early June, following a bleak consumer sentiment announcement, the RSI fell to 30, hovering on oversold territory. Since then, it has risen closer to 40 as consumer sentiment and perspectives on economic conditions have slightly improved.
However, whether or not the RSI will continue on this uptrend remains to be seen.
For the remainder of 2022, market sentiment, which may be shaped by the coming GDP and inflation figures, could push RSI into oversold territory once again. As a bright spot this may be good news—reinforcing a turning point in the market.
Markets in a Minute
Visualized: How Bonds Help Reduce Bear Market Risk
How have bonds historically performed during a bear market? How have different stock and bond allocations performed?
This infographic is available as a poster.
Visualized: How Bonds Help Reduce Bear Market Risk
Which tactics can investors use to reduce portfolio downside risk?
One time-tested method is allocating to bonds. Bonds have sheltered portfolio losses during bear markets thanks to the lower risk profile of bonds compared to stocks. Often, when stocks declined during market selloffs, safer assets like bonds tended to increase as the demand for stability grew.
This Markets in a Minute from New York Life Investments shows the performance of bonds and stocks during bear markets since World War II.
Bond Performance During Bear Markets
Bear markets are defined as a 20% or more decline in U.S. large cap stocks from peak to trough. Since World War II, bear markets have occurred less frequently than bull markets, with the U.S. stock market spending 29% in a bear market versus 71% in a bull market.
With this in mind, we show how a spectrum of portfolio asset allocations to stocks and bonds have performed over the last several bear markets.
- Stocks: represented by U.S. large cap stocks
- Bonds: represented by U.S. intermediate government bonds, which are issued with maturity dates between two and five years
| Allocation (Stock / Bond) | Average Drawdown | Average Time Until Recovery* |
|---|---|---|
| 100% / 0% | -34% | 3.3 years |
| 90% / 10% | -31% | 3.2 years |
| 80% / 20% | -28% | 2.9 years |
| 70% / 30% | -24% | 2.8 years |
| 60% / 40% | -20% | 2.5 years |
| 50% / 50% | -16% | 2.1 years |
| 40% / 60% | -11% | 1.2 years |
| 30% / 70% | -7% | 0.8 years |
| 20% / 80% | -4% | 0.8 years |
| 10% / 90% | -2% | 0.5 years |
| 0% / 100% | -1% | 0.2 years |
*Length of time until new all-time high
For a 100% stock portfolio, the average drawdown was -34%, with 3.3 years until recovery—the time it took to reach a new all-time high.
Comparatively, a portfolio entirely made up of bonds fell -1% on average during bear markets with a recovery time of just a few months.
Balanced Portfolios in Bear Markets
Looking closer, we show how adding bonds to a portfolio has cushioned portfolio losses over the following market downturns, sometimes by as much as 20 percentage points.
| Bear Market | 100% Stock Portfolio Max Drawdown | 60/40 Portfolio Max Drawdown |
|---|---|---|
| 2020 | -20% | -10% |
| 2008 | -51% | -30% |
| 2001 | -45% | -22% |
| 1988 | -30% | -17% |
| 1973 | -43% | -26% |
| 1969 | -29% | -18% |
| 1962 | -22% | -13% |
| 1947 | -22% | -13% |
A balanced 60/40 portfolio had a 20% average drawdown, recovering in 2.5 years. During the 2020 COVID-19 crash, for instance, a 60/40 portfolio fell almost 10% and fully recovered in six months. By contrast, a 100% stock portfolio declined nearly 20%.
In all of the above historical downturns, investors with a diversified portfolio have been better positioned in a bear market.
Building Portfolio Strength
Bonds have historically seen less volatility than stocks during tougher financial conditions. Typically, riskier assets like stocks have been more prone to market fluctuations than bonds.
To prepare for a bear market, investors can structure a portfolio that aligns with their risk tolerance. Over the long run, the diversification benefits of bonds have been fundamental to protecting portfolios and lowering risk.
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