Goldman: Oil Markets Haven’t Fully Priced In Geopolitical Risk Premium

Oil prices rallied early on Tuesday, with the U.S. benchmark WTI Crude topping $100 a barrel for the first time since July 2014, as the market scrambles to assess the potential loss of supply from Russia after the SWIFT ban for Russian banks over Putin's invasion of Ukraine.

And the geopolitical premium over the war in Ukraine is even higher than current oil prices, according to Goldman Sachs.

As of 9:26 a.m. ET on Tuesday, WTI Crude was rallying 5.10% at $100.86, and Brent Crude was trading above $103 per barrel, up 5.34% at $103.51, as the Russian war in Ukraine continues. Banks have started to pull out financing for the purchase of Russian commodities, including oil, after selected Russian banks were banned from the SWIFT banking messaging system over the weekend.  

"The market may be underestimating the risks of tighter supply on oil pricing, which remains a key risk from the ongoing conflict -- so we think the 'risk premium' here should probably be larger," Goldman Sachs strategists led by Dominic Wilson wrote in a note to clients on Monday, as carried by Bloomberg.

However, the market may have started to overestimate the potential of the war to significantly change Fed's monetary tightening schedule, Goldman's analysts said. 

On Sunday, Goldman Sachs said that only demand destruction could stop oil from rising to $115 over the next month due to the difficulties Russia will have in payments for its energy exports. "Commodity markets need to reflect not only these difficulties in paying for Russia's exports but, with little left to sanction, the risk that Russian commodities eventually fall under Western restrictions," Goldman's strategists said.

Reports that OPEC+ will be staying the course of 400,000-bpd monthly increase for April despite $105 oil also supported oil prices on Tuesday, a day ahead of the OPEC+ group's meeting on Wednesday.

By Tsvetana Paraskova for Oilprice.com

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