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JANUARY 07, 2020

U.S. Iran conflict: Oil risk premium on the rise

  • U.S. Iran tensions flare again to start 2020

  • Late 2019 crude spike supported by fundamentals, but future supply growth could limit gains

  • Oil price risk premium has increased, but short term move may be down


On January 2 a U.S. drone strike eliminated Iran’s top military leader, General Qassem Suleimani. The assassination came as a result of Iranian proxies in Iraq crossing President Trump’s stated redline by killing a U.S. contractor and injuring three service members. In the wake of Suleimani’s “removal from the battle field” there has been a flood of wide-ranging speculation as to how the Iranians may retaliate. Attacks on oil assets held by U.S. companies and allies have topped the list for many pundits. This in turn has pushed oil prices higher as traders add a risk premium to account for the potential loss of barrels from the market. A similar occurrence was seen last September after Iran launched an attack on Saudi Arabia’s Abqaiq processing facility and Khurais oil field. That event caused approximately half of Saudi Arabia’s production to be temporarily offline (~4.1M barrels/day). This time around there has not yet been any tangible impact on global oil output as a result of the increased U.S. & Iran tensions. As such, oil prices may have peaked in the short term and could retrench as the market waits for Iran to make its next move. Recall last September’s price spike was short lived as well (see Chart 1). Oil prices rolled over then due to a consensus view that, even with a temporary reduction in Saudi output, world oil markets were fully supplied and future demand growth was waning.  Since that time increased confidence that China and the U.S. will conclude a “phase 1” trade deal, coupled with better global economic data, has powered a strong oil rally. A more positive late 2019 view on oil was also supported by additional OPEC+ output cuts announced in early December, which occurred alongside declining U.S. inventories. However, 2020 will witness significant new supply growth from non-OPEC countries including Norway, Brazil, Guyana, Canada, and the U.S, and these dynamics may cap any significant upward move for crude. 


Adding it all up, a few dollar risk premium added to oil prices due to the recent U.S. Iran conflict seems like a reasonable outcome, but the market will likely need actual oil supplies to be impacted for prices to move much higher. Over the near term the upward oil price spike may actually lose momentum until the next move is made.            

Current Market News - Equity Research - U.S. Iran conflict - Oil risk premium on the rise
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