Oil Shocks/War: Lessons from 1990 – 1991

By datatrekresearch in Blog

June 23, 2025

In this video, DataTrek co-founder Nick Colas breaks down how oil prices and US stocks responded to Iraq’s invasion of Kuwait in August 1990 and the subsequent Gulf War I in January - February 1991. The S&P 500 bottomed on the same day WTI peaked, long before there was a resolution to this geopolitical crisis. This lesson is important for today should current Mideast tensions grow worse in the coming days and weeks.

Watch it here on our YouTube channel. Please hit like/subscribe and share this video if you find it useful!

Transcript:

Hi, Nick Colas from Data Trek here and given the events of this weekend, I just wanted to drop a quick video describing how we think about oil prices, Mideast geopolitical tensions, and stock prices. The analysis I'm going to walk through today very briefly is what happened in 1990 and 1991 in and around Iraq's invasion of Kuwait and then Gulf War I. This is a study that we actually showed our clients last week to make them prepared for what might come and wanted to release a little bit of it to the broader investment public today.

So the chart we're going to look at just shows oil prices from 1990 through the end of 1991 and it's annotated with how different geopolitical events informed oil prices and stock prices.

So let's just go through it in chronological order. 1990 was until July a pretty okay year. Kind of a lot like this year. The S&P was up 4.4% at its highs on July 16th. And oil prices came down from the mid $20s to $16-17 dollars a barrel. You know, very much kind of an ordinary kind of year.

That all changed on August 1st and 2nd when Iraq invaded Kuwait after a long um disagreement with them about drilling oil on the border between the two countries. And it was a big shock. And you can see that in this first leg of the chart where oil prices go very quickly from $20 to $30 a barrel. That first peak on August 7th was just days after the invasion and the S&P had actually fallen at that point by 9.3% from its peaks on July 16th. So a very quick pullback, a very quick lift in oil prices as one would expect.

The peak in oil prices and the trough in stocks came on October 11th kind of in a no man's land in terms of all the events that were to unfold. Oil prices got back up to over $40 a barrel literally for the first time since the Iranian revolution in 1979. So it was a big shock big move in oil prices and the S&P troughed on the same day down 16.4% year-to date and down 19.9% from the peak.

So literally right on the cusp of a bare market. We'll call it a bear market because in fact it felt like one. I recall it vividly. So October 11th was the peak in oil prices just over $40 and the trough in stock prices.

Now there were a lot of negotiations and a lot of UN resolutions but by mid January it was clear there's going to be a military confrontation between a US-led coalition and Iraq. So on Jan 16 just at the beginning of what was called desert storm began. Oil prices spiked but the S&P was still up 7% from the trough. So even though we were really on the cusp of major military action, what was then a very strong military power in the Middle East, stocks were still higher.

By Feb 24, the ground invasion began. There was a long gap of just an air campaign against Iraq. Then the ground invasion began on Feb 24 and the S&P was up 24% from the trough. So a big move. It was actually back to the July 1990 highs and oil prices collapsed back down to $15 a barrel. So even though there was a ground campaign set to start, the market had really discounted the eventual outcome which was Iraq being forced out of Kuwait.

And then if you roll forward to the end of the year, December 31st, the S&P was up 13.6% since the Feb 24 level. And so the market continued to rally even after the entire event was over.

So the summary here is I think very important in two points. The first is stocks track oil prices during a period of a Mid East geopolitical shock like we're seeing right now. I'm not trying to predict how this is going to end up. No one can. No one knows. But this template gives you a framework to understand how closely correlated oil prices are with stock prices.

And the second and even more important lesson is that markets discount outcomes, not headlines. Again, I remember this period of time vividly and it was really surprising to a lot of people that stocks could continue to rally even on the cusp of what was going to be a very major military event in the Middle East with a lot of potential risks to oil fields to political destabilization to the destabilization in the entire area and yet the market saw through all that.

So, as we look forward in the coming days and weeks, hopefully tensions cool and everything is going to be okay. But if it's not, just understand the market is not being stupid if it rallies on some kind of theoretically bad headline. All it's trying to do is forecast the outcome. It's not so interested in the headlines.

So with that, thank you very much for taking the time to watch this video. If you enjoyed it, please hit like and subscribe, of course. And if you want to check out our work and have access to this kind of information on a regular basis, please go check out datatrekresearch.com and sign up for a 2-week free trial. Thank you again and have a good day.