🕊️ The Ceasefire Effect: A Key Investing Statistic

March 25, 2025

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Hello, my friends!

Overall, markets traded relatively flat today with the S&P 500 trending near break-even by the lunch hour.

💼 This calm came as no surprise given the backdrop of proposed fiscal measures - a $4.5 trillion tax cut package alongside $2 trillion in spending cuts over the next decade -though none of these proposals have been finalized.

🛢️ Our attention, however, was drawn to a more volatile corner of the market: the energy-conflict sector.

🌍 Heightened geopolitical tensions have pushed this segment into focus, particularly with increasing pressure from China on Taiwan and the potential for ceasefire confirmation from Russia.

Key Headlines Moving the Energy Sector:

  • US Intelligence Report: China is expected to ramp up economic pressure on Taiwan if it moves toward formal independence.

  • US Annual Threat Assessment: China's dominance in critical materials mining and processing poses a significant risk.

  • Ukraine’s President Zelenskiy: Announced the implementation of a partial ceasefire.

  • Market Commentary: "I will ask Trump for weapons and new Russian sanctions if Moscow breaks the ceasefire," underscoring the market's sensitivity to conflict developments.

Crude Oil Impulse

Crude Oil

These headlines have had an immediate impact - pushing energy prices below key daily demand thresholds. Historically, major geopolitical announcements, especially ceasefire reports, tend to remove the risk premium built into crude oil prices.

In times of heightened conflict, buyers factor in extra costs to hedge against supply disruptions. Once a ceasefire is announced, that premium unwinds, often resulting in a 2–5% price drop within 24 to 48 hours.

A Brief Historical Perspective:

  • Risk Premium Unwinding: When conflict eases, crude oil prices typically fall as the extra risk premium dissipates.

  • Case Studies: Various studies using data from sources such as the U.S. Energy Information Administration and Bloomberg confirm that de-escalation news in conflict-prone regions tends to drive similar percentage declines.

  • Market Mechanism: Ceasefire announcements reduce uncertainty, curb speculative buying, and prompt market participants to quickly re-assess future supply conditions.

  • Context is Key: While these trends are robust, the magnitude of the price reaction can vary depending on broader market conditions, global supply-demand dynamics, and concurrent economic factors like OPEC production changes or shifts in U.S. economic data.

In summary, historical data consistently supports the view that ceasefire announcements in key regions lead to an immediate reduction in crude oil prices.

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Until next time,
Steve B
Founder, The Daily Impulse

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