A tale of two supply shortages: Chips & oil

Key takeaways

• The world faces two concurrent supply shocks: memory chips (AI demand) and oil (Hormuz closure)
• Higher memory chip prices will lead to increased capacity (though not likely before 2027)
• Higher oil prices are less likely to see the same supply response
• Opening the Strait of Hormuz will be critical to keeping inflation contained and global growth on track
• We are invested in both the AI capex cycle and the energy complex, across asset classes

Physical capacity has become the binding variable across two very different layers of the economy: oil and semiconductor chips.

Chips

Memory chip (semiconductor) prices have rocketed (+80% in “NAND”/ “DRAM” at the time of writing). Our colleague, Benjamin Hall outlines clearly in his piece If memory serves | W1M why the major global producers, such as Samsung Electronics, have been slow to react to the rapid rise in worldwide demand resulting from AI’s insatiable appetite for High Bandwidth memory (HBM). New factories can take a couple of years to build, and companies don’t want to invest huge amounts only to find prices have fallen by the time they have more product to sell. They have suffered that fate in the past. But for now, like any commodity, price is the balancing mechanism, and the price has risen as demand for memory chips substantially outstrips supply. Major producers enjoy high prices, margins and profits currently; the risk, however, is that new supply comes onstream (a) just as demand begins to decline and/or (b) to such an extent that it creates an excess, thus driving the price down. This seems unlikely in the short term; indeed, Ben concludes that “it is therefore likely that the supply deficit worsens in the near-term”, implying a further upwards move in memory prices is possible.

Memory price upcycle

Source: Factset

Oil

Meanwhile, the world’s media has been focused on another inflationary supply shock – one emanating out of the Middle East.  On 2nd March, Iran effectively closed the Strait of Hormuz. Tankers passing through the strait fell from 250 per day to roughly zero, effectively removing 20 million barrels per day (mbpd) from global oil supply, a roughly 20% decline. This is a very significant mismatch between the supply and demand for oil, a market which usually balances at sub-1mbpd differences. With oil supply dropping suddenly, neither demand nor government policy could react quickly enough, and the oil price rose to $120 at its peak. In the subsequent weeks, IEA members agreed to the largest ever release of reserves (400 million barrels) and various non-members elected similarly to support supply and, in some cases, curtail demand. This kept a lid on oil prices and saw the spot price fall to around $100.

Problem solved?

Of the 20mpbd “removed” from the market, 4mb has effectively been re-added; redirected across Saudia Arabis via pipeline to Yanbu on the Red Sea. Oil can then be loaded onto tankers and (at the time of writing) exported to the global market via the Bab-el-Mandeb Strait (otherwise threateningly known as the ‘Gate of Tears’) or the Suez Canal. That brings the net loss of crude oil from 20mbpd to around 16mbpd. Of the 16mbpd remaining, Bernstein analysis indicates that Asia has reduced its imports by roughly 7mbpd, funded by some combination of rationing (and otherwise-reduced demand) and national reserve releases, 2.5mbpd has come from increased US and other exports, and the remaining 6.5mpbd has come from draws in inventories. Thus, over 30% of the supply plug comes from inventories. If we exclude the 4mbpd piped across Saudi Arabia, inventory draws represent 40% of the 16mbpd remaining.

Supply & demand adjustments following Hormuz closure

Source: W1M, Bernstein analysis; One billion barrels of lost supply. How long can inventories last?; 6th May 2026

While this is “problem solved” in the short-term, it is not a long-term solution because inventories are finite: without replenishment they will run out, and without a reopening of the Strait of Hormuz, we cannot quickly get back to 100mbpd of global supply. In this situation, two things would likely happen: first, the oil price would rise meaningfully; second, demand would decline as a result. Whether oil companies commit growth capex to increase supply is an open question. One might expect exploration & production (E&P) companies (such as Shell, Chevron, Exxon) want to capture the higher prices on offer by increasing production and selling more volume at these higher prices. But the very fact that a ‘deal’ between the US and Iran could come keeps them on the sidelines – the risk that they increase capex just as supply comes back onstream. Indeed, the structure of the oil market today tells this exact story: the market believes a deal will be done and the oil price will be more like $70-80 in a year or two.

Brent Crude forward curve

Source: W1M, Bloomberg

While memory chip supply looks likely to rise because the price is high enough to attract the capital, oil supply looks unlikely to react in the short term: the price is not high enough and outlook remains uncertain.

Inflationary shocks and portfolio implications

Equities: we do not own index funds but create portfolios of around 50 global stocks which we hold directly. This means that as we see inflationary pressures in both oil and technology related sectors, we are able to get meaningful exposure to companies seeing their earnings boosted by unexpectedly high prices for their products.

• In the oil energy space, we own Shell in our equity allocation, which benefits not just from higher oil prices but also from higher oil and gas price volatility which it monetises via its trading arm.  Within our Alternatives allocation, we own a basket of oil services companies, alongside other oil and commodity-linked positions (which provide the physical material required for economic growth, including the AI buildout).
• Memory price increases: W1M portfolios have exposure to major producers such as Samsung Electronics and SK Hynix (which benefit from the global AI buildout).

Fixed income: Given the global economy faces significant inflationary pressures, it is not surprising to see  government bond yields higher as a result; that means greater interest burdens on many governments with consumers and business facing higher interest rates too. The charts below show that credit spreads (the difference in yield between a risk-free benchmark (like government bonds) and a riskier asset (like a corporate bond of the same maturity) have not moved much despite a much bigger jump in oil prices this year than was see in other geopolitical shocks such as the Iraq war; there has been a muted reaction in spreads. This implies markets are expecting the US-Iran conflict to be short term, as that seems to be in US interests, and then oil prices to fall thereby limiting medium to longer-term impacts on inflation. This may be optimistic, as described above; we are underweight fixed income generally but we have exposure to energy sector corporate debt in our portfolios (given those companies have seen strong earnings growth from higher oil prices).

Oil price shocks: Historical credit impact

US Corporate high-yield - credit spread (basis points)

Spread move vs oil price shock

*Note: First year values used for ongoing conflicts greater than 1 year in duration.

Source: ICE BofA, W1M. Data as at 31 March 2026.

Real Assets enhance the inflation resilience of portfolios given miners ultimately demand higher prices for metals if their costs rise or they go bust. Other companies, such as utilities, can have long “inflation plus” contracts which enable them to pass on higher costs.

Inflation resilience: Long term commodity cycle showing signs of recovery

U.S. Commodity Price Index (data 1795 to present) with major inflation peaks (red dots) & major inflation troughs (orange dots)

Source: Stifel, W1M, Bloomberg. As at 31.12.25. 

Passive multi asset strategies can have lost decades

As in 2022, when there is an inflation shock, regardless of where it comes from, and resultant upward pressure on  interest rates, equity indices and bonds can fall together rather than being diversifying. Passive funds holding bonds and equities can have very long periods of weak performance. After a long period of passives doing well, the market may have forgotten that passive strategy returns can be poor: Post the dotcom crash, for example, there was a 9 year period in which a negative return was delivered from a passive strategy. That is a long time to be patient. Active investors can mitigate this risk partly by not replicating the concentration observable in key indices.

Passive 60/40 portfolios have endured 6 "lost decades" since 1900; could we be entering no. 7?

Source: BofA, Bloomberg. As at 31.12.25.  Note: 60/40 = 60% S&P 500 real total return and 40% US 10-year bond real total return

Risk warning: Past performance is no guarantee of future results.

Summary

The global economy is dealing with more than one “inflation shock”. In this environment, we are underweight fixed income as rates are expected to rise in most developed economies; we are neutral on equities at current levels, overweight real assets for inflation resilience, and implementing bespoke protection strategies in case volatility spikes. The importance of being properly diversified, actively choosing what to own and what not to own, having inflation resilience in portfolios and protection strategies, as we go into the summer, seems clear.

Summary of our views

May asset allocation positioning

*The table shows bond allocations relative to bond composite index

**Hedging includes gold & Protection Strategy if possible.

Source: Morningstar. As at 05.03.26. The weightings are calculated as a percentage of the Waverton Balanced platform model portfolio and the peer group equivalent of Model GBP Allocation 40-60%. MSCI AC World weighting assumes a 60% allocation to equity. The above should be used as a guide only and is subject to change.

Glossary

Inflation: Refers to the general rise in prices across the economy over time, reducing the purchasing power of money and influencing interest rates, investment returns and living costs.

Supply and demand: Describes the fundamental economic relationship between how much of a product is available and how much people want it, which ultimately determines pricing in markets.

Artificial Intelligence (AI): Technology that enables machines to process data, learn and make decisions, and is increasingly driving demand for computing power, infrastructure and advanced semiconductor components.

Market volatility: Measures how much and how quickly asset prices move, often rising during periods of uncertainty, geopolitical tension or economic disruption.

Real assets: Tangible investments such as commodities, property or infrastructure, that derive value from physical demand and can help protect portfolios during periods of inflation.