What’s at Stake — Supply Disruption or Peaceful Resolution
What’s at stake is potential supply disruptions driven by possible military action against Iran by the United States. The situation went from optimistic to tense quickly overnight. For most of the session on Thursday there seemed to be a relative calm in the market as the latest talks held in Geneva seemed to indicate a possible peaceful resolution to the simmering tensions between the two countries.
During the negotiations the United States remained firm on its insistence of zero enrichment of uranium by Iran. However, Iran could be digging in on its claim to have a right to a nuclear program. Oil prices initially eased on Thursday after an Omani mediator said both countries had made progress, but that calm vanished quickly after U.S. President Trump ordered a military build-up in the region.
Traders Erring on the Side of Caution as Strike Risk Rises
Meanwhile, oil traders appear to be erring on the side of caution with today’s big runup in prices. More traders seem to be betting on a military strike because a deal hadn’t been reached by Thursday’s deadline and we are close to entering Trump’s 10-to-15-day “window of time” when “really bad things” will happen.
To go along with the uncertainty over if or when a war will break out, Saudi Arabia has decided to take protection against possible military action by vowing to increase production and exports to cushion against a supply disruption from the region. This will mean more supply will be available on top of a huge jump in crude inventories as reported by the U.S. Energy Information Administration on Wednesday.
OPEC+ is also expected to raise its monthly oil outlook by 137,000 barrels per day for April at its March 1 meeting.
Analysis of the recent price action indicates that speculators and hedgers have built in about $8 to $10 of risk premium, according to Reuters.
