The long shadow of the 1991 Gulf War looms large on the commodity market today. That conflict may seem distant to many readers. Fax machines were in use. Drone strikes were not.
In August 1990, Saddam Hussein invaded Kuwait. Iraq had a standing army of over 1 million soldiers and a potent air force. Kuwait was an oil-rich state with a minor military. It crumbled in a few hours.
Iraq’s invasion of Kuwait shocked the oil market. Prices skyrocketed from US$17 per barrel in July 1990 to US$46 per barrel by mid-October. There was a fear of a prolonged shortage.
However, the conflict ended as suddenly as it began. US President George Bush assembled a vast coalition that included the Soviet Union and most Arab states.
Bush masterminded Operation Desert Storm — a land and air assault on Iraqi-controlled Kuwait. The US-led allies entered Kuwait from Saudi Arabia and dislodged Iraq from Kuwait. It led to the liberation of Kuwait in a few days by February 1991. With the crisis averted, oil prices tumbled back to pre-war levels. It averaged around US$20 per barrel by the end of 1991.
The short and savage conflict left 300,000 dead. Today, a bloodbath of a different kind seems imminent. There is a strong chance of a commodity collapse.
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The Russian invasion of Ukraine in 2022 has had a deep impact on commodity markets. Russia, a major oil, gas and wheat exporter, faced severe sanctions. This led to disrupted supply chains and soaring prices. Brent crude flirted with US$100 a barrel. Natural gas prices in Europe reached abnormal heights. Wheat prices doubled as Ukraine is a pivotal grain exporter.
The immediate reaction was similar to 1990. There was panic, followed by a frantic search for alternatives.
The US and Ukraine seemed to have reached a draft minerals deal. The agreement could be a prelude to a peace deal between Ukraine and Russia. Trump wants to bring the war to an end.
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There could be a resumption of Russian exports. A peace agreement could lead to the lifting of sanctions. Russian commodities could flow back into global markets. This sudden influx would increase supply. It could exert downward pressure on prices. A potential peace deal might allow Russian energy to flow freely, affecting oil and natural gas supply and prices.
Consumption patterns have changed since 2022. High prices have a way of curbing consumption. Europe, for instance, has accelerated its shift toward renewable energy. It has cut its reliance on fossil fuels.
An unwind could take place. The commodity markets saw a surge of speculative investments. Traders were betting on sustained high prices. There could be a sharp correction.
The post-Gulf War commodity collapse offers a valuable lesson. The price surge was unsustainable. Commodity traders adapted. They increased production and adopted alternative energy investments. The market corrected itself. By the end of 1991, oil prices had fallen by 60%. In fact, some oil-rich states, such as Saudi Arabia and the Soviet Union, faced a crisis after 1991.
Investors on the Singapore Exchange need to be nimble. There are more than 30 offshore & marine stocks listed, including Seatrium. Singapore is a star performer in floating production systems and jack-up rigs. Offshore marine stocks have risen 35% in the last three years. A falling oil price market could cause the cancellation of oil rig orders. The sector is now trading at an EV/Ebitda multiple that is 15% above its 10-year average. There could be a sharp correction as markets can overreact.
There is another oil that this region is dependent on — palm oil. Palm oil prices have risen 30% since the Russian invasion. The plantation stocks like Golden Agri Resources and First Resources have remained flat. The plantation stocks are a shadow of their heyday in the noughties. Fund managers are averse to investing in them due to environmental, sustainability and governance issues.
A sharp drop in palm oil prices could cause a retreat in plantation stocks. It could add fuel to a tepid industry. The holders could have a compelling excuse to dump them.
Investors need to watch out for a 1991 rerun. It could be a déjà vu again.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era
