Oil prices no longer baking-in geopolitical risk premium for current ME conflict By Investing.com

Oil prices have remained surprisingly stable despite rising geopolitical tensions in the Middle East, particularly in the wake of major violent incidents involving Hamas and Hezbollah leaders, Wells Fargo analysts said in a note dated Monday.

These events, taking place in sensitive areas such as Tehran and Beirut, have exacerbated the risk of further regional conflicts and raised concerns about potential disruptions to global oil supplies, especially through the vital Strait of Hormuz, which accounts for nearly 21% of global daily demand.

Historically, geopolitical events in the Middle East have been closely linked to rising oil prices, as markets react to potential threats to oil supplies. However, the current situation represents a departure from this pattern.

Oil prices, which have fallen to the $70 per barrel range, do not reflect the geopolitical risk premium that they did in previous conflicts. This muted response can be attributed to the protracted nature of the current conflict, where initial fears of supply disruption have given way to a more conservative understanding of the actual risks involved.

According to Wells Fargo, oil markets tend to be very sensitive at the start of such conflicts, with prices reacting sharply to news and fears of potential supply disruptions. But as the conflict progresses, the market’s sensitivity diminishes as the risks become more understood and priced in.

This numbness is evident in the current scenario, where oil prices have stabilized, despite the ongoing conflict, reflecting the true balance between global supply and demand without a significant geopolitical risk premium.

“But investors should be aware that the risks of supply and trade disruption appear to be rising,” analysts said.

Wells Fargo analysts warn that while the market may currently underestimate the risks, any further escalation could quickly reintroduce the geopolitical risk premium, potentially adding $5 to $15 a barrel to oil prices.