The oil and gas risk premium is back

By Peter Stewart 19 April 2017
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A Canadian oilsands refinery. OPEC production cuts and global political issues mean the supply of oil is starting to tighten. (Nexen) A Canadian oilsands refinery. OPEC production cuts and global political issues mean the supply of oil is starting to tighten. (Nexen)

Geopolitical risk is back on the agenda for energy commodities. North Korea, Syria and Afghanistan have been the main targets of a more assertive American foreign policy. President Donald Trump’s quick-fire actions have also fuelled concern a fresh round of US sanctions on Iran may be imposed sooner rather than later. Meanwhile, the potential for instability in Venezuela and Turkey is also rattling the market.

In recent months, the huge stockpiles of oil held around the world have eliminated the geopolitical risk premium that has dominated the oil market for most of the last half-century, and particularly after the 2011 Arab Spring. When oil is abundantly available from existing stocks, it reduces the impact of supply outages. But the International Energy Agency, in its latest Oil Market Report, said supply and demand were now "close to balance". Funds have been buying energy futures and also safe-haven assets such as gold.

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