Why oil prices could fall in a global conflict — Echoing the COVID demand shock

When geopolitical tensions rise, oil markets tend to react almost automatically by pushing prices higher. The dominant narrative is straightforward: war threatens supply. Yet this reaction may overlook a powerful counterforce — demand destruction.

The world witnessed a dramatic example during the COVID-19 pandemic. As governments and societies shifted into crisis mode, economic activity slowed sharply. Air travel collapsed, commuting declined, tourism disappeared, and discretionary consumption was rapidly curtailed. The sudden contraction in mobility and economic activity caused global oil demand to fall by an unprecedented magnitude. The result was the extraordinary moment in April 2020 when futures for West Texas Intermediate crude oil briefly traded at negative prices.

A large-scale geopolitical conflict could trigger a similar behavioral and economic response. In times of systemic uncertainty, households and businesses tend to move into defensive mode. Consumers cut non-essential spending, corporations postpone investment, and global trade slows. Even without formal lockdowns, societies often reduce travel, leisure activity, and other energy-intensive forms of consumption.

Such a shift would have significant implications for energy demand. Much of the world’s oil consumption is tied to transportation and economic mobility. If global commerce slows and discretionary movement declines, demand for fuel could fall far more rapidly than markets currently anticipate.

Financial markets often focus on the risk that war may disrupt oil production or shipping routes. However, the COVID experience demonstrated that demand shocks can overwhelm supply concerns when the global economy suddenly contracts. If a major geopolitical crisis were to push the world economy into a defensive posture similar to that seen in 2020, the oil market could once again face a sharp imbalance between supply and consumption.

In that scenario, rather than spiking higher, oil prices might instead follow a path closer to the pattern seen during the pandemic: a rapid erosion of demand leading to significant downward pressure on prices. The possibility that oil could mirror the COVID demand shock is therefore a scenario that markets may not be fully pricing today.