Tensions in the Middle East have highlighted the ups and downs of the geopolitical risk premium on oil prices so far this month. Analysts estimate that the price of oil is currently between $5 and $10 per barrel, reflecting a risk of escalation in the Israeli-Iranian conflict.
Last week illustrated how traders view geopolitical risk. While Brent prices fell as low as $80 following an Iranian drone attack on Israel over the weekend of April 13-14, oil rose 3% early on April 19 following reports reporting an Israeli missile hit in Iran.
Price fluctuations in response to tensions in the Middle East show that traders continue to assess varying degrees of escalation or de-escalation of the conflict on any given day or time.
However, the current state of oil market fundamentals contains some shock absorbers, as Reuters market analyst John Kemp noted in a commentary on Thursday.
Unless direct threats to Middle East oil production and exports emerge, the market should be able to absorb the decline in Iranian oil supply, whether from U.S. sanctions stricter measures or disruptions to Iran’s oil production capacities, analysts say. Related: China harvested record volumes of Russian oil in March
The impact of an Israeli missile has reignited fears of a wider escalation, but so far no oil supplies from the Middle East have been directly threatened.
Additionally, the market is currently in such shape that it has the highest spare capacity in years and a build-up of commercial inventory has emerged this month. These measures should offset some of the geopolitical risk that has persisted in the market since Hamas’s attack on Israel last October.
Analysts estimate that OPEC+, which has once again firmly regained control of the oil market, has an unused capacity of around 5 million barrels per day (bpd) of oil production which can be gradually returned in the event of strong tensions on the markets and a rise in oil prices above 100 dollars per barrel.
This is OPEC’s highest spare capacity since the 2009 recession, with the exception of 2020, when the pandemic crushed oil demand and prices and global producers held back 10 million b/d on the market.
The OPEC+ group could influence oil prices by returning some of the 2 million bpd it currently keeps off the market – unless, of course, the Strait of Hormuz is blocked for tanker traffic, which would cripple oil exports from all Middle Eastern producers. , including Iran.
A major disruption in the Strait of Hormuz is a “low probability” event, according to analysts.
“Oil prices are likely to reflect some of these risks with a geopolitical risk premium in the coming months, but we believe we would need significant escalation to see a pronounced rise to 2022 highs of 125 dollars per barrel compared to $90 per barrel today,” JP Morgan said earlier this week.
Then there is the creation of commercial stocks which act as a downward brake on prices.
While U.S. commercial inventories are just below the five-year average for this time of year, there has been a downward trend in accumulations so far this month, including an inventory build of 5.8 million of barrels for the week preceding April 5 and an increase in stocks. of 2.7 million barrels for the week preceding April 12, according to EIA estimates.
US crude oil inventories have reached their highest level in ten months, “raising some doubts about the current level of demand”, Saxo Bank said in a market commentary on Thursday.
The downward trend in stocks continues in the United States, with current production so far this month more than 13 million barrels higher than April’s five-year average, consultancy FGE said in a note on Friday.
“Most notably, total commercial inventories of U.S. crude and products are 3 million barrels higher than a year earlier, after being 40 million barrels lower in mid-March,” FGE noted.
High OPEC+ spare capacity, recent stockpiling in major markets, and further increases in non-OPEC+ production this year could blunt the price impact of tensions in the Middle East. Barring a real supply disruption, these “shock absorbers” could prevent oil from climbing to $100.
By Tsvetana Paraskova for Oilprice.com
More important reading on Oilprice.com:
Tensions in the Middle East have highlighted the ups and downs of the geopolitical risk premium on oil prices so far this month. Analysts estimate that the price of oil is currently between $5 and $10 per barrel, reflecting a risk of escalation in the Israeli-Iranian conflict.
Last week illustrated how traders view geopolitical risk. While Brent prices fell as low as $80 following an Iranian drone attack on Israel over the weekend of April 13-14, oil rose 3% early on April 19 following reports reporting an Israeli missile hit in Iran.
Price fluctuations in response to tensions in the Middle East show that traders continue to assess varying degrees of escalation or de-escalation of the conflict on any given day or time.
However, the current state of oil market fundamentals contains some shock absorbers, as Reuters market analyst John Kemp noted in a commentary on Thursday.
Unless direct threats to Middle East oil production and exports emerge, the market should be able to absorb the decline in Iranian oil supply, whether from U.S. sanctions stricter measures or disruptions to Iran’s oil production capacities, analysts say. Related: China harvested record volumes of Russian oil in March
The impact of an Israeli missile has reignited fears of a wider escalation, but so far no oil supplies from the Middle East have been directly threatened.
Additionally, the market is currently in such shape that it has the highest spare capacity in years and a build-up of commercial inventory has emerged this month. These measures should offset some of the geopolitical risk that has persisted in the market since Hamas’s attack on Israel last October.
Analysts estimate that OPEC+, which has once again firmly regained control of the oil market, has an unused capacity of around 5 million barrels per day (bpd) of oil production which can be gradually returned in the event of strong tensions on the markets and a rise in oil prices above 100 dollars per barrel.
This is OPEC’s highest spare capacity since the 2009 recession, with the exception of 2020, when the pandemic crushed oil demand and prices and global producers held back 10 million b/d on the market.
The OPEC+ group could influence oil prices by returning some of the 2 million bpd it currently keeps off the market – unless, of course, the Strait of Hormuz is blocked for tanker traffic, which would cripple oil exports from all Middle Eastern producers. , including Iran.
A major disruption in the Strait of Hormuz is a “low probability” event, according to analysts.
“Oil prices are likely to reflect some of these risks with a geopolitical risk premium in the coming months, but we believe we would need significant escalation to see a pronounced rise to 2022 highs of 125 dollars per barrel compared to $90 per barrel today,” JP Morgan said earlier this week.
Then there is the creation of commercial stocks which act as a downward brake on prices.
While U.S. commercial inventories are just below the five-year average for this time of year, there has been a downward trend in accumulations so far this month, including an inventory build of 5.8 million of barrels for the week preceding April 5 and an increase in stocks. of 2.7 million barrels for the week preceding April 12, according to EIA estimates.
US crude oil inventories have reached their highest level in ten months, “raising some doubts about the current level of demand”, Saxo Bank said in a market commentary on Thursday.
The downward trend in stocks continues in the United States, with current production so far this month more than 13 million barrels higher than April’s five-year average, consultancy FGE said in a note on Friday.
“Most notably, total commercial inventories of U.S. crude and products are 3 million barrels higher than a year earlier, after being 40 million barrels lower in mid-March,” FGE noted.
High OPEC+ spare capacity, recent stockpiling in major markets, and further increases in non-OPEC+ production this year could blunt the price impact of tensions in the Middle East. Barring a real supply disruption, these “shock absorbers” could prevent oil from climbing to $100.
By Tsvetana Paraskova for Oilprice.com
More important reading on Oilprice.com: