Energy Traders Remove Large Portion of Geopolitical Risk Premium

Energy traders have today removed a large portion of the geopolitical risk premium still discounted into crude, gasoline, and to a lesser extent gold futures.

That’s what Chris Weston, the Head of Research at Pepperstone, said in a market analysis sent to Rigzone this morning, which highlighted “Israel’s anticipated retaliation on Iran”.

“Energy traders have increased conviction levels that Iranian crude facilities will not play a part in the ongoing conflicts,” Weston stated in the analysis.

“Israel’s actions, at least from the weekend response, reduce the prospects of other regional and Western players becoming involved,” he added.

“With the prospects of Iranian oil facilities being left out of Israel’s military plans, the demand side of the crude supply/demand equation should become increasingly more influential as a near-term price driver,” he went on to state.

In the analysis, Weston noted that Donald Trump, should he become president, could play a significant role in influencing the crude price and have the market firmly refocus its attention back on supply. He added, however, that this would be conditional on the Republicans controlling both chambers of Congress.

“While the U.S. is already producing 13.5 million barrels per day, if Trump were able to make good on his proposal to increase U.S. crude production by an additional three million barrels per day, this level of output could have far-reaching implications,” Weston said in the analysis.

“Naturally, Trump knows the Saudis have the capacity to take its daily run rate up three million barrels per day and towards 12 million barrels per day, but if the U.S. were to move first, the Saudis, and many in the OPEC+ alliance, would be faced with either a further loss of market share or countering but risk pushing the crude price towards $60,” he added.

Weston stated in the analysis that Trump has the clear advantage of wanting a lower crude price and said this will offer him leverage.

“Should we see a Trump presidency and a Republican sweep, the battle between the major crude-producing nations will be an incredibly interesting dynamic and one that becomes even more interesting if Trump can deliver on his call that he will mediate peace between Russia and Ukraine,” he said.

Weston described that peace as “an outcome that could see European constraints on Russian imports reduced – a factor that would only increase the headwinds being thrown at the oil markets”.

Rigzone has contacted the Trump campaign for comment on Weston’s analysis. At the time of writing, Rigzone has not yet received a response.

In a separate market analysis sent to Rigzone this morning, Michael Brown, a Senior Research Strategist at Pepperstone, highlighted that Friday night/Saturday morning “brought the long-awaited Israeli retaliation to the Iranian missile barrage launched towards the start of the month”.

“At first glance, the nature of this retaliation seems relative[ly] limited, with strikes having targeted primarily military installations, and not oil or nuclear infrastructure,” Brown added.

Impact Less Severe Than Anticipated

In another market analysis sent to Rigzone on Monday, Antonio Ernesto Di Giacomo, a Senior Market Analyst at XS.com, highlighted that, “at the market opening, oil prices have shown a notable drop of more than four percent in Asian markets following an Israeli attack targeting Iran”.

“Despite the tensions generated by this event, the impact was less severe than anticipated, immediately affecting the crude market,” he added.

Di Giacomo pointed out that the Israeli attack avoided nuclear and oil sites in Iran and said it significantly reduced the uncertainty that had reigned in the previous weeks.

“Despite Iran’s threat to retaliate, the fact that the attack avoided critical facilities managed to moderate concerns about a possible significant escalation in the conflict,” Di Giacomo stated in the analysis.

“In recent months, oil prices have seen a considerable increase due to the growing tension between Israel and Iran, exacerbated by ongoing operations against factions like Hamas and Hezbollah,” he added.

“However, this episode seems to have reduced the likelihood of a larger-scale confrontation, at least in the short term,” he continued.

Di Giacomo warned in the analysis that the situation in the Middle East remains volatile, “as Israel has continued its military offensive in the region”.

“The potential for future tensions should not be underestimated. Although the immediate threat appears to have diminished, the situation in the Middle East can change rapidly, affecting energy markets unpredictably,” he added.

“The international community and major energy market players will continue to monitor the region’s upcoming developments closely. The presence of non-state actors, such as Hamas and Hezbollah, adds an element of uncertainty, as these groups can influence regional stability,” he went on to state.

Weighing Geopolitical Developments

In a market analysis sent to Rigzone on Friday, Joseph Dahrieh, Managing Principal at Tickmill, highlighted that traders were weighing geopolitical developments in the Middle East.

“Diplomatic efforts could help ease escalation fears and put a weight on oil prices,” Dahrieh said at the time.

“The market remains close to its lowest levels this year and could see more losses if the geopolitical conditions improve. However, a flare-up in tensions could push oil prices for a rebound,” he added.

“At the same time, demand levels remain a concern for the market and continue to weigh on expectations,” he continued.

“In this regard, traders could continue to monitor developments in China to gauge the impact of its slowing economic growth on crude demand levels, including the outcomes of China’s NPC Standing Committee meeting. Any signs of pro-growth policies could boost oil demand, supporting crude prices,” Dahrieh said.

In a Rystad Energy market update sent to Rigzone on October 17 by the Rystad team, the company’s Middle East Research Director, Aditya Saraswat, warned that “a full-blown war could choke the Strait of Hormuz, risking up to 12 million barrels per day of oil, driving prices up sharply”.

“Asian oil importing nations would face increased costs and disrupted supply chains, heightening market concerns,” Saraswat added.

The Rystad Research Director noted in that update that, in a widespread regional war scenario, Iran and Israel’s conflict could severely impact gas exports and lead to delays in oil development projects.

“Attacks on key facilities may threaten nearly 1.4 million barrels per day of Iranian production, causing significant supply disruptions,” Saraswat said.

To contact the author, email andreas.exarheas@rigzone.com