{"id":6590,"date":"2023-10-29T02:44:54","date_gmt":"2023-10-29T02:44:54","guid":{"rendered":"https:\/\/inbudgetalerts.com\/investment\/4-reasons-why-oil-prices-have-only-seen-a-modest-middle-east-risk-premium\/"},"modified":"2023-10-29T02:44:55","modified_gmt":"2023-10-29T02:44:55","slug":"4-reasons-why-oil-prices-have-only-seen-a-modest-middle-east-risk-premium","status":"publish","type":"post","link":"https:\/\/inbudgetalerts.com\/?p=6590","title":{"rendered":"4 reasons why oil prices have only seen a modest Middle East risk premium"},"content":{"rendered":"
\n

There are four reasons why oil prices are not trading that much higher than they did before the Hamas attack on Israel nearly three weeks ago, according to Capital Economics.<\/p>\n

In the past, \u201crising geopolitical tension in the Middle East \u2014 even if it\u00a0doesn\u2019t\u00a0affect supply \u2014 has been enough to prompt a surge in oil prices,\u201d wrote Caroline Bain, chief commodities economist at Capital Economics, in a note Thursday. \u201cBut\u00a0so far, investors have not rushed to price in the new risks.\u201d<\/p>\n

\n

The \u201ccautious oil market reaction to the outbreak of conflict in Israel probably reflects the huge uncertainty about the eventual outcome, but also a somewhat lower Middle East risk premium,\u201d she said.<\/p>\n

As of Thursday, U.S. benchmark December West Texas Intermediate crude
\n CLZ23,
\n -0.44%<\/bg-quote><\/p>\n

CL.1,
\n -0.44%<\/bg-quote>
\n traded at $83.88 a barrel on the New York Mercantile Exchange. That\u2019s about 1.3% higher than the Oct. 6 settlement of $82.79, the day before the Oct. 7 Hamas attack which started a war between Israel and Gaza.<\/p>\n

Global benchmark December Brent crude
\n BRN00,
\n -0.03%<\/bg-quote><\/p>\n

BRNZ23,
\n -0.04%<\/bg-quote>
\n traded at $88.49 on Thursday \u2014 4.6% higher than the Oct. 6 settlement. <\/p>\n

Given that the oil market is currently in a supply deficit, the risk of additional supply disruption should have had an \u201coutsized impact on prices,\u201d said Bain. Israel does not produce oil in any quantity so there is little direct impact on supply, but there is the \u201cvery real risk\u2026that the conflict escalates and regional players, who are also large oil producers, get involved.\u201d<\/p>\n

That includes Iran, which accounts for 24% of oil reserves in the Middle East and 12% in the world, at the end of 2021, according to the U.S. Energy Information Administration. Iran has been known to aid the militant group Hamas. <\/p>\n

Read<\/strong> Israel-Gaza war scenarios: Here\u2019s what might lift oil prices to $95, $100 and $115 a barrel<\/p>\n

Still, oil producers in the Gulf are now \u201cmuch more integrated into global financial markets\u201d than in the past and would not want to risk sanctions, said Bain. <\/p>\n

Capital Economics, however, has \u201cargued for some time that the Middle East-related risk premium in the oil price is in decline, probably since the 1970s,\u201d she said.<\/p>\n

Here are the four reasons why that risk premium has fallen:<\/strong><\/p>\n

First of all, \u201cthe Middle East\u2019s share of global oil production has dropped from 40% in 1970 to around 30% in 2022,\u201d Bain said. Efforts have also been made within the region to ease potential choke points, Bain said, pointing out that Saudi Arabia developed export routes on its west coast so it can bypass the Strait of Hormuz if that oil chokepoint were to be blocked.<\/p>\n

Second, there\u2019s \u201can alternative and more flexible source of supply in the form of U.S. shale oil,\u201d said Bain.<\/p>\n

Third, most countries now have \u201csizeable strategic reserves to drawdown in the event of supply disruption,\u201d she said. The Biden administration ordered the largest-ever release of oil from the U.S. Strategic Petroleum Reserve last year, in the wake of the Russia-Ukraine war. <\/p>\n

Read:<\/strong> U.S. is set to play tug of war with OPEC+ for oil market share as Middle East hostilities warrant output boost<\/p>\n

As for reason number four, growth in global oil demand is now \u201csignificantly lower than in the past, and may even turn negative soon as the electrification of transport gathers pace,\u201d said Bain. <\/p>\n

In a monthly report released Tuesday, the International Energy Agency said global demand for fossil fuels is likely to peak before 2030. <\/p>\n

All that said, Bain emphasized that the market would \u201calmost certainly\u201d see a spike in oil prices if Iran, or another large oil producer in the region were to become actively involved in the Israel-Hamas conflict. <\/p>\n

For now, \u201cit appears that investors do not think this is a major risk,\u201d she said. \u201cThe huge uncertainty about the outcome of the conflict means that we can only discuss the risks, with a view to revising our [oil-price] forecasts as and when the fundamentals change.\u201d<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

There are four reasons why oil prices are not trading that much higher than they did before the Hamas attack on Israel…<\/p>\n","protected":false},"author":1,"featured_media":6591,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[24],"tags":[],"class_list":{"0":"post-6590","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-investment"},"yoast_head":"\n4 reasons why oil prices have only seen a modest Middle East risk premium | InBudgetAlerts<\/title>\n<meta name=\"description\" content=\"There are four reasons why oil prices are not trading that much higher than they did before the Hamas attack on Israel nearly three weeks ago, according\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/inbudgetalerts.com\/?p=6590\" \/>\n<meta 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