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There is not much of a Mid-East risk premium to be seen

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The Brent crude oil price has seen some good gains lately and mostly it has been explained with rising Mid-East tensions. But if we use the 3mth rolling implied crude oil volatility as a measure of such a ”risk premium” it is below the historical average since 2008 and has fallen back lately.

Bjarne Schieldrop, Chief analyst commodities, SEB

Amid all the media noise coming out of the Mid-East there are smaller bits and pieces of fundamentals which seems to drown out amid the noise. US crude stocks fell 9 million barrels last week and total US stocks fell 22.3 m b. The Chinese government has just announced that it will cut its reserve-requirement ratio within two weeks which is a positive for growth down the road. Global crude inventories dropped by 24 m b last week due to disruptions in the US, Libya and Kazakhstan according to Macquarie group. Crude time-spreads have moved back up to levels often seen in 2023 and oil product cracks have risen into the new year (except for 3.5%) which is often a sign of solid oil product demand and/or strained supply.

So as of yet, it doesn’t look like it is much a risk premium in oil due to the Mid-East tensions.

Brent crude 3mth forward ATM implied volatility. Falling back rather than rising. Should probably have spiked if there was real fear for Mid-East oil supply disruptions

Source: SEB graph, Blbrg data

And sorting from low to high since Jan 2008 the current level of 31% is rather lukewarm:

Brent crude 3mth forward ATM implied volatility since Jan 2008. Not much fear currently.

Source: SEB graph and highlights, Blbrg data

And speculators are not rushing in to buy oil in the hope of cashing in big time if we get disruption and a spike. Net long specs are instead at a bob-bob level with little rush from buyers.

Net-long specs in Brent crude and WTI with last data point as of Tuesday last week. Up from a recent low-point but still very muted level.

Source: SEB graph and calculations, Blbrg data

And looking at spec positions with a rolling 52 week ranking it is less than medium. Well on par with the level of backwardation:

52 week ranking of net long specs vs. Brent backwardation. Lukewarm with little sign of net long hording.

Source: SEB graph and calculations, Blbrg data

On the fundamental side however the product cracks have strengthened into the new year

Front-month ARA oil product cracks versus Brent crude have strengthened into the new year. Except for 3.5% cracks. But still a solid sign for oil product demand

Source: SEB calculations and graph, Blbrg data

And time-spreads have recovered back from the slump just before Christmas. Again a normal sign of an oil market with fairly balanced to tight fundamentals.

Time spreads 1-3 mth for Brent, Dubai and WTI have all revived back to levels seen much of last year.

Source: SEB graph and calculations, Blbrg data

If we assume that changes in US oil inventories typically is a residual of the global oil market balance. If the world is in surplus then US inventories will typically rise and vise versus. Total US oil inventories have basically flat-lined in 2023 and still is. That indicates a fairly balanced global oil market.

Total US crude and product stocks incl. SPR

Source: SEB graph and calculations, Blbrg data

If we compare US total commercial crude and product stocks since Jan 2008 with inflation adjusted oil prices it indicates that current Brent crude oil price at USD 82/b is probably a quite fair price level.

The Brent crude oil price vs. US commercial crude and product stocks excl. SPR. Current oil price is well aligned with regression line.

Source: SEB graph and calculations, Blbrg data

Inlägget There is not much of a Mid-East risk premium to be seen dök först upp på Råvarumarknaden.se.

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