FOR those seeking an answer to the question as to what the Middle East conflict risk premium is in the price of crude oil, the 5.3% drop in Brent futures early yesterday provides some enlightenment.
Global benchmark Brent contracts dropped as low as US$71.99 a barrel in early Asia trade yesterday, down from the close of US$76.05 last Friday.
They later recovered to trade around US$72.73.
The fall came after Israel launched a series of air strikes against regional rival Iran at the weekend, finally delivering the long-expected retaliation for Tehran’s most recent missile barrage.
Israel attacked what it called strategic missile sites in Iran, with Prime Minister Benjamin Netanyahu saying they had “hit hard”.
However, Iran downplayed the extent of the damage, with Supreme Leader Ayatollah Ali Khamenei saying the attack “should neither be downplayed nor exaggerated”.
The oil market has taken the view that the Israeli attack and the Iranian response effectively amounts to a de-escalation of recent heightened tensions.
This is because Israel didn’t strike at Iran’s nuclear of crude oil export and refining capabilities, and Tehran’s response was somewhat less bellicose than after previous incidents.
The challenge for oil investors is how to price the Middle East conflict going forward.
There obviously remains the risk of renewed escalation and miscalculation by the myriad of both state and non-state actors engulfed in the Middle East conflict.
But it also remains the case that so far most players have been scrupulous in avoiding attacking crude oil exports and energy infrastructure, the only exception being some limited strikes by Yemen’s Iran-aligned Houthi militants against shipping in the Red Sea.
It probably is still the case that some measure of risk premium should remain in the crude oil price, but this should only be ratcheted higher when there is a real threat to crude oil exports and infrastructure.
The easing of the risk premium for now will also allow the crude market to focus on the broader drivers of prices, and these currently remain fairly downbeat.
OPEC, China
The Organisation of the Petroleum Exporting Countries and its allies (Opec+) group of exporters is still scheduled to start winding back some of its production cuts from December, with a target of lifting output 180,000 barrels per day (bpd), the first step in a series of increases over 2025.
The group, which includes Opec+ including Russia, earlier delayed its plan to starting lifting output from October, given the downtrend in crude prices that has been in place since early July.
The problem for Opec+ is that the anticipated recovery in oil demand is not quite materialising as fast or as strongly as they had expected.
Demand in Asia, which buys about two-thirds of global seaborne crude, has been lacklustre so far in 2024, and October arrivals are likely to have continued the recent trend.
Asia’s crude imports are on track to be around 26.74 million bpd in October, which is slightly below the 27.05 million bpd seen in September, according to data compiled by LSEG Oil Research.
For the first nine months of the year, Asia’s imports were 26.7 million bpd, which is actually down 200,000 bpd from the same period in 2023.
Much of the weakness can be laid at the door of China, the world’s biggest crude importer, which has seen arrivals decline 350,000 bpd in the first nine months of this year compared with the same period in 2023.
While there is some optimism that China’s stimulus measures will boost its economy, it also may be the case that the sectors that benefit most won’t actually drive crude demand higher, especially given Beijing’s focus on boosting consumer spending and encouraging the switch to electric vehicles. — Reuters
Clyde Russell is a columnist for Reuters. The views expressed here are the writer’s own.
