Geopolitics and supply shocks: sanctions, wars and trade routes

What you will learn

• The three main channels of geopolitical supply shocks: sanctions, wars and trade routes
• A four-question framework for judging real supply loss
• How to estimate the cost of rerouting cargo and compare it with the price reaction
• Why differentials and risk premiums matter more than headlines

Explanation

A supply shock is a sudden, unexpected change in the amount of a commodity reaching buyers. Geopolitical shocks come through three channels.

1. Sanctions

Sanctions are legal restrictions on trade with a country, company or person. Examples from Russia after 2022: the EU banned most imports of Russian crude oil by sea from 5 December 2022 and of refined oil products from 5 February 2023. The G7 countries introduced a price cap: Western shipping and insurance services may only be used if Russian oil is sold below a set price. The cap was first set at $60 per barrel; the EU has changed it since, so check the current level. Sanctions often redirect oil to other buyers at a discount rather than removing it. The result is a wider price differential (the gap between two related prices, for example a sanctioned crude grade versus Brent) and higher freight costs. In metals, the London Metal Exchange (LME) stopped accepting newly produced Russian aluminium, copper and nickel for delivery in 2024 after US and UK sanctions.

2. Wars and attacks

Wars can destroy production, pipelines, ports and refineries, or make them uninsurable. In 2022 European gas prices reached record levels when Russian pipeline deliveries fell sharply. On 8 March 2022 the LME nickel price more than doubled within hours to over $100,000 per tonne; the LME suspended trading and later cancelled trades made that day. A shock can break market functioning, not only move prices.

3. Trade routes and chokepoints

A chokepoint is a narrow sea route that a large share of trade must pass. According to the US Energy Information Administration (EIA), about 20 million barrels a day of oil, roughly 20% of world consumption of petroleum liquids, passed through the Strait of Hormuz in 2024, together with about one fifth of global liquefied natural gas (LNG) trade. In March 2026, during a war involving Iran, maritime security reports showed commercial shipping through the strait close to a halt; check the current situation. Since late 2023, attacks on ships in the Red Sea have led many shipping companies to sail around the Cape of Good Hope instead of using the Suez Canal, which adds days to a voyage.

The four-question framework

1. Is supply actually lost, or only at risk? Threats create a risk premium (an extra amount in the price for possible future loss). If the loss does not happen, the premium can disappear within days.
2. How large is the buffer? Compare the potential loss with spare capacity (production that can be added quickly) and inventories, including strategic reserves.
3. Can flows reroute, and at what cost and delay? Rerouting raises costs and widens differentials but keeps supply moving.
4. How long can it last? Short disruptions mainly lift the front months of the futures curve (lesson 7); long ones lift the whole curve.

Worked example

Hypothetical example: A tanker carries 1,000,000 barrels of crude. Avoiding a dangerous route adds 14 days. The ship and fuel cost $60,000 a day. A war-risk insurance premium on the remaining route is 0.7% of the ship's value of $100 million per voyage. Port fees and cargo insurance are excluded.

1. Extra voyage cost: 14 × $60,000 = $840,000, or $840,000 ÷ 1,000,000 = $0.84 per barrel.
2. Insurance: 0.7% × $100,000,000 = $700,000, or $0.70 per barrel.
3. Total extra logistics cost: about $1.54 per barrel.

Suppose the headline moved oil by $8. Logistics explain about $1.54; the remaining $6.46 is risk premium. Now check the buffer: if the realistic loss is 1.5 million barrels a day and spare capacity outside the region is 3 million barrels a day, the loss can in principle be covered and the premium may fade. Spare capacity behind the same chokepoint does not help.

Common mistake

Practice activity

Hypothetical: an export pipeline carrying 0.8 million barrels a day is shut. Producers elsewhere have 2.0 million barrels a day of spare capacity, but bringing it to market takes about 60 days. Commercial inventories can cover a shortfall of 30 million barrels.

Tasks: (1) How many barrels are lost in 60 days if nothing else changes? (2) Can inventories bridge the gap until spare capacity arrives? (3) Which part of the futures curve would you expect to react most, and why?

Limitations: Real markets also adjust through demand, other routes and policy decisions such as releases from strategic reserves.

Key takeaways

• Sanctions mostly redirect supply and widen differentials; wars and chokepoint closures can remove supply.
• Ask four questions: lost or at risk, size of buffer, rerouting cost, duration.
• Logistics costs explain only a small part of a price spike; the rest is risk premium.
• Geopolitical shocks can also disrupt trading itself, as the 2022 LME nickel suspension showed.

Next step

In lesson 12 you turn these lessons into rules: how to manage volatility, limit moves and gaps when trading commodities.