Oil bears couldn’t stay the course for long. Not of the fault of their own this time though but the bear run remained short-lived nonetheless. Who would have seen the most recent Middle East crisis coming.
Brent crude gained nearly 6 percent on the last trading session – comfortably the largest daily gain recorded since April. The WTI crude oil too gained 6 percent, sending oil back in the 90s which was being termed as the new-normal not so long ago. The weekly gain was also the highest in over a month.
All of this boils down to the heightened geopolitical risk owing to the situation in Israel and Palestine. Neither country is a meaningful contributor to global oil demand or supply and the physical market hasn’t altered due to the confrontation.
That said, international oil market remains a tight market in terms of supply. Markets are now attempting to build and incorporate a risk premium to the likely escalations of Israel into Gaza. Mind you, the Gaza strip is not a route that will have any impact on global crude oil transportation but the fear is now higher that the impact could be felt as far as Iran and Syria – both critical for the crude oil ecosystem.
The situation right now is very fluid but with real risks of Iran entering the equation and that is where it could go all haywire. The West has also started to come down hard on any violations by global crude oil traders viz. price cap as part of sanctions on Russian crude.
Geopolitical risk premiums in the past have stayed incorporated for considerable periods even if demand and supply dynamics require price correction. It’s anyone’s guess how the situation in Israel unfolds and what will be the new risk premium attached to it. But weeks of uncertainty in a tight supply market only means one thing. More time off for the bears.
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