A fading geopolitical premium in Oil
- The decline in the geopolitical premium is weighing on Brent.
- The Oil market is returning to pre-war levels.
Having fallen by around 0.5% on Monday, the US dollar gave up the gains it had made following strong employment figures on Friday. Yields on Treasury bonds resumed their decline following a brief rally, driven by Brent’s sharp fall to its lowest levels since August, amid comments from Donald Trump that he currently considers a resumption of hostilities in the Middle East unlikely while negotiations are ongoing.
Oil has fallen by more than 20% from its late-October highs as investors continue to price out geopolitical risk premiums. At the same time, transport costs are falling, while production and export volumes are returning to pre-war levels. According to a Reuters survey of experts, OPEC oil production rose to 22.87 million barrels per day in October, around 90% of the level seen at the start of the conflict in the Middle East.
In addition, China is ramping up its oil imports to levels last seen at the end of February, with a 9.4% month-over-month increase to 9.88 million barrels per day. Data from the Baltic Exchange in London points to a fall in transport costs, with the cost of chartering a supertanker to carry 2 million barrels from the Gulf of Mexico to Asia falling to $45 million, compared with $79.6 million a month ago.
That said, despite Donald Trump’s statements that the chances of a resumption of hostilities are low, Iran continues to attack tankers in the Strait of Hormuz as the situation in Saudi Arabia remains tense. Washington describes Tehran’s demands as unrealistic, while Iran is waiting for the White House to change its stance following the US midterm elections. The results of these elections could make Iran less conciliatory, complicating a diplomatic resolution to the conflict and potentially leading to an escalation.
As a result, the oil market is being forced to react to positive expectations and signals, although it is still too early to speak of a fundamental change in the situation. However, if diplomacy reaches an impasse and hostilities resume, the price per barrel will start rising again.
The recent price peaks have not yet been reflected in US inflation figures, the release of which the markets are eagerly awaiting later on Tuesday.
Summary: Oil is down over 20% from October highs as geopolitical premiums fade, but stalled diplomacy or renewed fighting could send Brent higher.
Author
Alexander Kuptsikevich, a senior market analyst at FxPro, has been with the company since its foundation. From time to time, he gives commentaries on radio and television. He publishes in major economic and socio-political media.
