Brent: Risk premium sustained as Middle East tensions persist – ING

ING strategists Warren Patterson and Ewa Manthey note that Oil and ICE Brent prices remain firmly supported around $110/bbl as markets focus on Middle Eastern supply risks. They highlight a significant risk premium driven by geopolitical volatility and record tanker freight rates. China’s crude data suggest inventory drawdowns and weaker apparent demand, reinforcing a tight but risk-sensitive Oil market outlook.

Oil risk premium and China inventories

"Oil prices remain well-supported amid ongoing tensions in the Middle East despite relatively strong Persian Gulf flows. This suggests the market is pricing in a significant risk premium, given the situation's volatility. However, if flows continue uninhibited despite the geopolitical environment, the risk premium would likely erode slowly."

"Namely, the record tanker freight rates we are seeing, given the less efficient use of tankers due to developments in the Middle East. The US is considering steps to allow the sale of sanctioned tankers, which would increase tanker capacity in the legitimate market. The idea is to bring freight rates down and reduce the delivered cost of oil to destination."

"However, uncertainty remains about how much capacity this could add to the legitimate market. The process's duration means it may not offer immediate relief."

"China released output data yesterday showing that domestic crude oil production rose 0.6% month-on-month and 2.5% year-on-year to 4.45m b/d in September. Meanwhile, refineries processed a little over 14m b/d of crude over the month, up 0.4% MoM but still down 8.4% YoY. This is the largest amount of crude processed by Chinese refiners since March."

"Along with previously released trade data, this suggests that China drew down crude oil inventories at a pace of a little more than 500k b/d, or 16m barrels through September. The numbers also suggest that apparent demand fell by 2.7% MoM and 15.2% YoY to 12.75m b/d in September."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)