Oil: Risk premium returns on Gulf supply concerns – Commerzbank

Commerzbank’s Thu Lan Nguyen argues that recent US policy towards Iran has reversed market expectations of a rapid normalisation in Gulf energy supplies, challenging earlier pricing of an Oil supply glut. With the Iran deal apparently called off by President Trump, she notes that Middle East risks remain unresolved, implying a renewed risk premium and potential volatility in energy prices.

US stance revives supply risk

"Over the past few days we had expressed scepticism about the rapid decline in the oil price, not least because shipping traffic through the Strait of Hormuz has picked up but still remains well below pre-war levels. The market, however, appeared to look straight through this and was already pricing in supply glut on the oil market."

"It turns out that the US administration shares our sceptical assessment of the oil supply situation rather than the market’s. And since Washington felt that the normalisation of energy supplies from the Gulf region was not proceeding quickly (and smoothly) enough, the deal with Iran has apparently been called off, according to US President Trump."

"Of course, this does not necessarily mean that the situation in the Middle East has to escalate again immediately. Trump’s harsh threats may merely be strategic sabre‑rattling intended to force the Iranian side into making concessions more quickly. Moreover, talks are likely to be continuing behind the scenes. The last word has by no means been spoken."

"But this episode is likely to show the market that it cannot consider the conflict to be over as long as the parties have not agreed on a final peace settlement. This, in turn, means that market participants will, for the time being, have to factor in a higher risk premium again, associated with potentially renewed price swings in energy prices."

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