supply shock

A sharp price reaction, often upward, caused by an event that forewarns that a much smaller quantity of product or goods will be available in the future. The market’s perception of supply, rather than actual supply levels, is the crucial element in determining supply shocks. For example, the energy industry experienced supply shock in 1990 when Iraq invaded Kuwait. Traders predicted that the supply of crude oil from Iraq would be impacted by the turmoil and by the anticipated invasion of Kuwait by the United States. Oil prices more than doubled during the following several months. However, those price increases were soon erased in future months when it became apparent that the war would be short-lived and would not disrupt prices. The opposite is demand shock, which is a surprise development that impacts buyers’ decisions to purchase goods.