Crude oil prices continue to rise as tensions in the Middle East boil over. TD Securities strategists analyze the oil price outlook.
The expansion of conflict has led to substantially higher recoveries
Since 1981, we have observed that geopolitical risks have faded as soon as one month after the start of a conflict. In most cases, the premium had completely evaporated within six months. Interestingly, we also observed more prolonged price weakness thereafter, suggesting that subsequent oil shocks may have been associated with subsequent macroeconomic headwinds or increases in supply. However, expanded conflicts have led to substantially larger recoveries.
For the moment, implied volatilities remain well below those recorded in the most recent analogous cases, although the evolution of prices is so far consistent with the localized conflicts. This is related to the notable increase in spare capacity, mainly in the Gulf countries, which could help offset the loss of Iranian barrels or the tightening of US sanctions. However, in such a case, global spare capacity would return to critically low levels, requiring a risk premium.
Source: Fx Street
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