Oil markets: Geopolitical risk premium evaporates

Stephen Innes SPI Asset Management

Crude oil took a nosedive as supply-side pressures began to ease. The geopolitical risk premium, which had been inflating prices, started deflating when the US announced that Israeli Prime Minister Benjamin Netanyahu had accepted a bridging proposal to cool tensions between Israel and Hamas. A de-escalation in the Middle East could make that risk premium evaporate faster than a puddle in the desert sun.

Meanwhile, word from market intelligence over in Libya indicates that production at the Waha oil field has rebounded to its usual output of around 300,000 barrels per day, thanks to pipeline maintenance finishing ahead of schedule. However, it's not all smooth sailing—Libya's Sharara field remains offline due to a political standoff between rival governments, keeping a lid on a full recovery.

On the demand side, China remains a bit of a wildcard. Despite a surge in summer travel, the growing preference for high-speed rail and electric vehicles is putting a dent in gasoline consumption. According to a Bloomberg report, sales at China’s two biggest oil retailers, PetroChina and Sinopec, have slumped by over 5% since July.

The US, however, is a whole different kettle of fish, as Americans still love to hit the open road. Domestic demand is holding strong, with AAA reporting that bookings for domestic travel over the Labor Day weekend are up 9% year-over-year. So while China’s appetite for oil is cooling, Americans are revving up and hitting the highways, keeping some demand firmly in the tank.

Author

Stephen Innes

SPI Asset Management

With more than 25 years of experience, Stephen has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.

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