Hans van Cleef, senior energy economist at ABN AMRO, suggests that geopolitical tensions had already increased in recent months and even as these tensions have been lingering for some time, recent events significantly raise the risk of an escalation.
Key Quotes
“We have seen earlier drone attacks on the Saudi oil infrastructure, and attacks on tankers which threaten a closure of the Strait of Hormuz. After the latest drone attacks on the Saudi oil production facilities, the US seems to be cooperating with Saudi Arabia, and a military response could still follow. Iran threatened an ‘all-out war’ in case of any US or Saudi military strike. Such an escalation of the situation seems in nobody’s interest, but cannot be fully ruled out.”
“We have seen proxy wars in the region for quite some time now. However, since these wars have taken place in regions where oil production cannot be hurt, financial markets essentially ignored them. Now that tensions between crucial oil producers Saudi Arabia and Iran are building, one could be forgiven for thinking a higher risk premium than is priced in at this moment may be justified.”
“The fact that the market is not pricing in a significant risk premium indicates that expectations of an escalation are very low. And in the event of a temporary production disruption, expectations are that this can be met by existing inventories and spare capacity. As a result, the Brent/WTI spread – which is seen as a good indicator of geopolitical risk premium – has barely widened.”
“Since WTI mainly reflects oil market conditions in the US, while Brent better reflects conditions in Europe and the Middle East, any increase in the spread would reflect softer conditions in the US (not happening now) or increased supply risk in Europe and/or the Middle East.”
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