How big is the oil price ‘risk premium’?

After an 18 month hiatus the oil market has rediscovered the term ‘geopolitical risk premium’.

Oil supply outages are at their highest level in more than a decade bolstering the risk premium that has helped drive crude oil prices from $35 per barrel back in February to $50 per barrel in early June.

According to energy economist Philip Verleger Jr. the $15 per barrel rise in prices can be entirely explained by recent unplanned outages. The outages removing at least 1 million b/d and up to 2 million b/d at its peak. read more

Change in investor sentiment could see oil falling back to the low $30’s

A change in investor sentiment could easily result in oil prices falling back to the low $30’s per barrel. That’s the view of Barclays who highlight that net positions from money managers (e.g. hedge funds and other speculators) in crude are approaching bullish extremes, a position from where sentiment has reversed very rapidly over the past couple years (figure 1). If sentiment does change quickly and this is reflected in money managed positions then this could imply that WTI crude futures prices fall back close to $30 per barrel (figure 2). read more

A crude copy: 4 reasons why this could be a false dawn for oil prices

Yesterday Brent crude prices jumped by over 5% to over $40.50 per barrel, the first time the oil price has risen above $40 per barrel since early December and up more than 40% from its January low. But, could this be a false dawn for oil prices just like in 2015?

Loss of confidence in output freeze: Saudi Arabia, Qatar, Venezuela and non-OPEC member Russia agreed last month to freeze output at January levels, but only if others do the same. Russia’s energy minister has indicated that a meeting between OPEC and other leading energy producers could take place between 20th March and 1st April. However, the market could quickly lose confidence in the initiative, even if there is agreement. The key to an agreement taking hold will be Iran’s participation, but it is unlikely to want to cede acquiring market share now that sanctions have been removed. Recent isolated cuts to output (Iraq, Nigeria) were more to do with unrelated geopolitical than an attempt to actually control output. read more

Investors long on crude should be wary of shale producer hedges

Investment bank Societe Generale believes investors should look to purchase WTI crude futures contracts for Dec-17 at $45 per barrel or lower, given their view that the price is unsustainably low.

The same Dec-17 WTI contract hit a record low of $37.38 per barrel in January, rebounding to the low forties as rumours of an OPEC/Russia production cut surfaced. read more

Crude returns: How low oil prices have broken the relationship to food prices

Until recently, the price of crude oil and food moved largely in tandem. Since 2005 the correlation coefficient between the two price series (sourced from the IMF) has been +0.84. However, since late 2014 food prices have significantly outperformed crude oil prices.

Chart: Crude oil versus food prices


Note: The IMF food price index includes cereal, vegetable oils, meat, seafood, sugar, bananas and oranges while their crude oil price index is an average of Brent, WTI and Dubai.

Energy is a vital component of a farm’s operating costs. Direct energy consumption includes the use of diesel, electricity, propane, natural gas and renewable fuels for activities on the farm. Indirect energy consumption includes the use of fuel and feedstock (especially natural gas) in the manufacturing of agricultural chemicals, such as fertilisers and pesticides. read more

Forecasting folly: Why forecasts of a rebound in oil prices are prolonging pain

What incentive have US shale operators got to shut production, or the banks that are financing them to pull the plug? Okay, oil prices are hovering about $30 per barrel now, just above operating costs, but if many of the investment banks are to be believed prices are set to rise rise sharply during 2016. Are optimistic forecasts just serving to prolong the period of droopy prices?

The start of the year has seen investment banks tearing up previous forecasts by ~$20 per barrel as the price of oil has sunk during January. But what all (bar one) forecast is a recovery during 2016 and into 2017. read more