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What geopolitical risk premium?

  • This is the first edition of The Commodity Picture - and we’re very excited about it.
 
The Commodity Picture gives you a new perspective on trending factors currently impacting commodity prices, with a unique view from the sky. 
Expect a short letter in your inbox at the beginning of each month with a key trend deciphered with satellite images, a couple of charts, links to explore further.
 
A fresh angle on a hot topic, to step back on your busy day in the markets.
  • Geopolitical tensions have caused the highest disconnect between Brent prices and fundamentals since at least May 2016.
  • A Q4 collapse in oil prices forecast earlier this year by many analysts on the back of weak Chinese demand and ample supply capacity failed to materialize yet. Heightened Middle East tensions and fears of strikes on Iranian oil facilities have put a floor under prices, at least until now.
  • The geopolitical risk premium is proving hard to justify as fears of strikes on Iranian oil facilities have subsided, while the demand outlook remains bearish.
  • On current developments, fundamental factors seem set to reassert themselvesand the geopolitical risk premium has already started to weaken.
  • OPEC+ spare capacity stands at least at 5.6MMb, the highest level since Q4 2021. This is a conservative estimate that excludes capacity from Lybia (shut-ins), Iran and Russia (sanctions), and Mexico (declining production), and doesn’t factor in capacity increases (eg UAE).
  • Crude oil inventories data enables identification of market regimes. It shows the oil market is currently driven by geopolitics.
  • On current developments, fundamental factors seem set to reassert themselves and the geopolitical risk premium has already started to weaken.

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