MidEast risk appears substantially underpriced. Traders have concluded that this chapter in the Middle Eastern conflict has concluded, resulting in a sharp erosion of the supply risk premia baked into energy markets, TDS’ Senior Commodity Strategist Daniel Ghali notes.
Middle Eastern conflict has settles into an unstable equilibrium
“Interestingly, OPEC’s decision to delay their return of unwanted barrels by yet another month provided only a temporary boost to the supply risk baked into crude oil prices, but our decomposition of energy market returns suggest that another delay just won’t cut it.”
“In this context, without a resurgence in geopolitical risk tied to oil supplies, the set-up would favor continued downside in prices. Yet, the Middle Eastern conflict has settled into an incredibly unstable equilibrium, and President-elect Trump threatens to tighten sanctions enforcement on Iran akin to the ‘maximum pressure’ regime that upended oil flows during his last term.”
“In our view, the right tail has fattened once again.”
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