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Risk Premium Returns To Oil Markets As Geopolitical Tensions Rise

Geopolitical risk premiums are likely to return to oil markets as the possibility of an attack on a large petroleum facility grows significantly amid rising tensions in the Middle East, possibly putting a floor on prices.

"The risk of an attack is greater than 50pc, which means it is more likely than not," president of consultancy ESAI Sarah Emerson said on the sidelines of the Argus Americas Crude Summit.

Oil prices recently plunged to 13-year lows, to sub-$30/bbl, amid expectations a market oversupply will worsen as major supplier Iran ramps up exports following a lifting of sanctions, while the demand outlook remains weak as consumption in key market China slows. The supply-demand mismatch has kept investor attention away from the geopolitical unrest in the Middle East and the worsening economic and social crisis in producers such as Venezuela. Related: Oil Markets Are Balancing Faster Than IEA Would Have Us Believe

"Everybody has so far been focused on the oversupply," chief commodity strategist at RBC Capital Markets Helima Croft said, explaining the lack of a risk premium in the market right now. The high level of global oil inventories is giving the market confidence that any disruption in supplies will be quickly filled in, she said.

The latest escalation in the row between OPEC members Saudi Arabia and Iran came earlier this month after Riyadh severed its diplomatic relations with Tehran in response to the storming of its embassy by Iranian protesters angry at the execution of Saudi Shiite cleric Nimr al-Nimr. Related: Why The Oil Price Crash Is Killing The NHL

Members of the Iranian diplomatic mission to Riyadh have been asked to leave Saudi Arabia within 48 hours, Saudi foreign minister Adel Jubeir said yesterday. Jubeir said the attack on the Saudi embassy in Tehran was similar to attacks against the British embassy several years earlier, as well as on the U.S. embassy in 1979.

In the current weak market environment, producers can largely be put in two categories - one that is able to ride out the storm and the other that faces worsening prospects, RBC's Croft said. In the first camp are countries such as the UAE, Qatar and Kuwait, which have well-managed economies. In the second are countries such as Iraq, Nigeria, Venezuela, Libya and Algeria, Croft said. Related: The World Is Not Running Out Of Storage Space For Oil

Croft also said top producer Saudi Arabia is facing pressure from the plunge in prices because "they redoubled on social commitments" after the Arab Spring uprisings in 2011, Croft said. The country had committed to take care of its people "from the cradle to the grave." But with the fall in prices, they have had to announce austerity measures as a budget deficit worsens.

Oil markets may start to balance in 2017 as non-OPEC supplies continue to fall amid prices that render many fields - including many US shale operations - uneconomical, panelists said. But a slowdown in China will temper demand growth.

By Argusmedia

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