Oil: Risk premium faces policy test – ING

ING’s Warren Patterson and Ewa Manthey say Oil remains supported by a sizeable risk premium as markets await US-Iran and Russia-Ukraine talks in Geneva. They argue that a more de-escalatory tone could see bearish fundamentals reassert and push prices lower. Analysts also highlight OPEC+ supply decisions for April as a key driver for the balance sheet surplus.

Risk premium tied to geopolitics and OPEC+

"While oil prices edged higher on Friday, helped by a lower-than-expected US CPI print, ICE Brent still settled down week-on-week. However, there is still a large risk premium priced into the market given the uncertainty over how the situation between the US and Iran evolves. Comments from President Trump at the end of last week, saying that regime change would be best for Iran, will likely not ease concerns."

"These comments come ahead of further US/Iran talks scheduled in Geneva for Tuesday. Meanwhile, the US will also be leading the Russia/Ukraine talks starting the same day in Geneva. A tone which is more de-escalatory should see the market start pricing in a smaller risk premium, which would allow more bearish oil fundamentals to take centre stage, driving oil prices lower."

"There is growing noise around what OPEC+ may decide for April production levels when they meet on 1 March. The group had suspended supply increases in the first quarter of this year due to seasonality. However, with our balance sheet continuing to show a large surplus in the second quarter, there is no need for the group to bring additional supply onto the market from April."

"Despite this, some OPEC+ members reportedly believe that the market can cope with additional supply increases. In our balance sheet, we are not assuming further increases from the group, so clearly, if further supply is brought onto the market, it will only lead to our surplus expectations growing."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)