After the price of Brent crude oil rose, on the back of falling US inventories and Ukrainian drone strikes against Russian oil refineries, UBS Global Wealth Management discusses investment strategies for mitigating portfolio risks.

Oil prices jumped late last week after the latest data showed an unexpected draw in US crude inventories for the first time in seven weeks. Brent crude was trading above $85 per barrel on Friday, the highest level since early November, Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a note.

The potential for supply disruption after Ukrainian attacks on Russian refineries in recent days has also added to investor unease. The International Energy Agency is now warning of a supply deficit throughout the year, instead of a previously-expected surplus, Haefele said.

Brent’s price movement marked the biggest two-day rise since late January, and is a reminder that geopolitical conflicts remain a source of market volatility. While he sees fundamental tailwinds that can continue to support the equity rally, investor sentiment is also susceptible to a range of economic and market risks.

Ukraine’s latest attack against Russia with drones saw several oil refineries damaged and shut temporarily. The strikes caused a fire at Rosneft’s biggest refinery on Wednesday, as Kyiv stepped up attacks on Russian energy facilities in recent months, Haefele added. It has been over two years since Russia launched a full-scale invasion of Ukraine, and Russian President Vladimir Putin warned on Wednesday that the country was technically ready for a nuclear war. Separately, ceasefire talks between Israel and Hamas remain stalled, and attacks in the Red Sea region have continued. On Thursday, Houthi militants reportedly fired an anti-ship ballistic missile from Yemen into the Gulf of Aden.

The US presidential campaigns have kicked off in earnest and inflation concerns are still present. Haefele believes that investors should avoid overreacting to polls, and that longer-term portfolio decisions should be apolitical. But with the election still some eight months away, news headline on the campaigns are likely to create volatility ahead.

Equity market reactions to another month of strong US Consumer Price Index (CPI) and US Producer Price Index (PPI) data were muted, but inflation remains at the forefront of investors’ minds. The National Federation of Independent Business’ Small Business Optimism Index showed pessimism among small business owners, with inflation and labour quality their top concerns. The latest New York Fed inflation expectations survey also showed that US consumers’ longer-term outlook for inflation has increased from a month ago.

“While we continue to see a market outlook supportive of risk assets, investors should consider several strategies to mitigate portfolio risks, including adding exposure to gold and oil, and utilising structured investments with capital preservation features,” Haefele said. “Select hedge fund strategies can also help increase portfolio stability by capturing market gains and reducing drawdowns.”