Oil, Gold and the Break in Traditional Market Fundamentals

In April 2020, oil markets gave investors one of the clearest signs that traditional commodity fundamentals were no longer enough. For the first time in history, US WTI crude oil futures briefly traded below zero. At face value, this seemed impossible. Oil is a real asset. It powers transport, industry, shipping and global trade. But the event exposed something important: commodities are not priced by supply and demand alone. They are also shaped by futures markets, storage, delivery constraints and financial positioning.

A futures contract is an agreement to buy or sell a commodity at a set price for delivery at a future date. In normal conditions, this helps producers and consumers hedge risk. Oil producers can lock in future prices, while airlines, refiners and traders can manage exposure to price movements.

But in April 2020, the futures market collided with the physical world. Global demand had collapsed because of Covid lockdowns, storage was filling rapidly, and traders holding expiring contracts did not want to take delivery of physical oil. With nowhere practical to put the barrels, the price went negative. It was not that oil had no value. It was that immediate delivery had become a liability.

That moment matters because it showed how quickly commodity markets can break when physical constraints overwhelm normal assumptions.

Today, oil is facing a different kind of distortion: geopolitics.

The Iran situation has flipped the traditional oil framework on its head. Normally, investors look at demand, supply, inventories and OPEC production. Those still matter, but the key question today is broader: can oil move safely through the system?

Iran matters because of the Strait of Hormuz, one of the world’s most important oil chokepoints. If tensions rise, markets price in the risk that supply may be disrupted, even before barrels are actually lost. Insurance costs rise, shipping becomes more cautious, and a geopolitical risk premium enters the price.

But the reverse is also true. If markets believe tensions are easing, oil can fall sharply even if the underlying supply-demand picture has not changed much. This is what makes the current environment so difficult.

Oil is not simply trading on consumption or production. It is trading on the probability of disruption, de-escalation, sanctions, shipping risk and diplomatic outcomes.

The US dollar adds another layer.

Oil is largely priced in dollars. For non-US economies, a higher oil price combined with a stronger dollar creates a double squeeze. Energy becomes more expensive, import bills rise, inflation pressure increases and central banks face tougher decisions.

Historically, many investors assumed oil and the dollar would move in opposite directions. A stronger dollar made commodities more expensive for other buyers, often weighing on demand. But that relationship has become less reliable. The US is now a major energy producer, and in periods of geopolitical stress the dollar can strengthen as a safe-haven asset at the same time oil rises on supply fears.

That is another break in traditional fundamentals. Gold tells a similar story from the monetary side.

The old framework said gold should struggle when real yields are high and the dollar is strong. Yet gold has performed extremely well over the past two years. That suggests the market is being driven by something deeper than normal rate and currency models.

The key driver has been trust.

Central banks have continued buying gold as a reserve asset. After Russia’s foreign exchange reserves were frozen following the invasion of Ukraine, many countries began reassessing what financial security really means. US Treasuries remain the centre of the global system, but they are still someone else’s liability. Physical gold, particularly when held domestically, is not.

This does not mean the dollar is collapsing. That argument is too simplistic. The dollar remains dominant in trade, reserves and global finance. But gold’s strength suggests that central banks and investors want more diversification in a world of sanctions, high debt, geopolitical rivalry and fiscal uncertainty.

Gold has also benefited from persistent inflation concerns, expectations of future rate cuts, strong investor demand and geopolitical risk. In short, it has become a hedge not just against inflation, but against uncertainty in the monetary and political system itself.

Oil and gold are therefore telling the same story from different angles.

Oil shows the fragility of the physical system: storage, transport, chokepoints, shipping routes and geopolitical supply risk.

Gold shows the fragility of the monetary system: reserve concentration, sanctions risk, debt concerns and reduced trust between major powers.

Traditional fundamentals still matter. Supply, demand, rates and currencies have not disappeared. But they are no longer enough on their own. In this new environment, investors need to understand the physical and political layers beneath the price.

Oil tells us where the world is vulnerable. Gold tells us what the world no longer fully trusts.

DISCLAIMER:

This is an opinion piece on market conditions and is not meant to act as investment advice but rather as an educational piece and critial thinking