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The Expiry Date Of The Geopolitical Risk Premium In Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are inching higher on Friday, but the markets remain in a tight range for a third session after posting a more than 10% gain on Monday and a 5% drop on Tuesday. Nonetheless, crude oil is still in a position to finish about 6% higher for the week on the back of elevated tensions in the Middle East, following the September 14 attack on Saudi Arabian oil production facilities.

The gains this week are the risk premium traders have placed on the market just in case the Saudis can’t repair their oil production facilities in a timely manner.

Short-Term Outlook

Short-term, U.S. crude investors should probably assume that oil will stabilize in the $57.73 to $59.29 per barrel range and Brent in the $62.00 to $63.21 range with risk skewed to the upside. At this time, most traders agree that the central message from the attacks is the vulnerability of Saudi infrastructure. This is another reason for the placing of a risk premium.

Trading conditions have calmed considerably since last Sunday’s gap-higher opening and follow-through spike to the upside. However, the subsequent price action suggests that much of that move was fueled by short-covering and buy stops with very few speculators chasing prices higher. Since that initial move took place, the main concern for traders hasn’t been how much oil was lost due to the attacks, but whether Saudi Arabia will be able to…



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