Oil Market Remains Firmly in Wait and See Mode

The oil market “remains firmly in wait and see mode”, according to Ole R. Hvalbye, a commodities analyst at Skandinaviska Enskilda Banken AB (SEB).

In a SEB report sent to Rigzone on Tuesday morning, Hvalbye highlighted that Brent crude is trading slightly higher overnight, “up roughly $0.5 per barrel from yesterday’s close”, adding that, “since the end of last week, prices have moved largely sideways to marginally higher, currently hovering around $71.7 per barrel”.

“A geopolitical risk premium is already embedded, with U.S-.Iran tensions continuing to dominate headlines and shape overall risk sentiment,” Hvalbye pointed out in the report.

“That said, last week was notably strong. Since trading opened a week ago, Brent has gained around $4 per barrel, underlining how sensitive the market remains to incremental developments,” he said. 

“Every headline is being parsed for signals of escalation or de-escalation, and price action reflects exactly that, as renewed talks are scheduled this week alongside continued uncertainty around broader U.S. policy,” he added.

In the report, Hvalbye warned that rhetoric has sharpened again.

“President Trump stated that while he would prefer a deal, failure to reach one would have severe consequences for Iran, echoing that the final decision ultimately rests with him. A tone which suggests rising pressure ahead of the next diplomatic round,” Hvalbye noted.

The SEB Commodities Analyst highlighted that the U.S. and Iran are set to resume talks in Geneva on February 26, but pointed out that, “despite the diplomatic track remaining open, signals from Washington indicate that military planning remains active”.

The political backdrop complicates matters further, according to Hvalbye.

“A broad Middle East war and a sustained oil spike would be damaging for U.S. voters ahead of the midterms, something the White House is aware of,” he said.

“At the same time, significant military assets are now positioned in the region, and rhetoric has been hard to reverse without tangible diplomatic progress,” he added.

“The risk is not necessarily that war is the base case, but that escalation becomes difficult to unwind once positioning and expectations are elevated. That is the uncomfortable dynamic currently underpinning the geopolitical premium in oil,” he continued.

From a market perspective, the physical structure still reflects some tightness, Hvalbye stated in the report.

“Brent remains [in] backwardation, although prompt spreads have eased somewhat from the highs seen in January. In the options market, call skew remains elevated, suggesting that participants continue to hedge upside risk,” he said.

“Overall, diplomacy continues, but so does military positioning. Buckle up for increased volatility,” he warned.

In a Stratas Advisors report sent to Rigzone by the Stratas team late Monday, the company highlighted that the price of Brent crude oil ended the week at $71.24 per barrel after closing the previous week at $67.73 per barrel.

“As flagged last week, U.S.-Iran tensions dominated the rally,” Stratas noted in the report.

“President Trump warned of a potential limited military strike if no nuclear deal is reached within 10-15 days, backed by the largest U.S. military buildup in the Middle East since 2003 (including fighter jets, tankers, and repositioned assets),” the company highlighted.

“Iran responded with naval drills … temporary Strait of Hormuz closures for training, and threats of retaliation,” Stratas added.

“Markets are pricing in elevated but contained uncertainty – a major escalation disrupting Hormuz flows (carrying about 20 percent of global oil) could drive Brent toward $100, but current levels suggest a risk premium of $7-10 per barrel,” Stratas continued.

In a separate SEB report sent to Rigzone on Monday, SEB Chief Commodities Analyst Bjarne Schieldrop warned that U.S.-Iran negotiations “don’t look like they will be so easy” and added that the Iranian regime “doesn’t look like it is all that weak and far from ready to fold its cards”.

He highlighted, however, that none of the oil producing countries in the Middle East want to see waring activities break out.

Rigzone has contacted the White House and the Iranian Ministry of Foreign Affairs for comment on the SEB and Stratas reports. At the time of writing, neither have responded to Rigzone.

To contact the author, email andreas.exarheas@rigzone.com