Geopolitical Premium Pushes Oil Higher

Geopolitical risks are rising following the (likely) appointments of Mike Pompeo and John Bolton to US President Donald Trump’s foreign policy team and this increases the potential for disruptions to oil trade and supply.

The recent launch of the Shanghai Futures Exchange (SHFE) Chinese crude futures contract is also adding further uncertainty with market participants unsure as to how it will trade relative to current oil futures benchmarks.

The recent movement of crude price has seemed akin to the classic “geopolitical premium” trading environment as futures have spiked, percentage of volume has risen despite higher prices and yet few barrels have been lost (yet) and physical crude markets are still soft.

The geopolitical premium, potentially sizeable crude builds in March or April and a flurry of potential geopolitical flashpoints occurring in May look likely to keep oil markets choppy in the second quarter of this year – according to Citi analysts.

Despite no Iranian barrels being disrupted yet, the potential for disrupted supplies from Iran and Latin America has increased with John Bolton’s appointment as US National Security Advisor.

Bolton is a notable foreign policy hawk and a vocal critic of the Joint Comprehensive Plan of Action (JCPOA) deal, making it more likely that Trump won’t sign the sanctions waiver that is due no later than 12 May. The issue for oil markets is how to price this risk, as the decision doesn’t have a binary outcome and the timing is highly uncertain.

Financial flows continue to play a crucial role in price formation and Citi analysts believe the market may be positioned for a move to the upside in the near term – although Citi’s structural view on the oil market remains bearish into 2019.

Citi’s forecast for ICE Brent prices are $59 per barrel in 2018 and $49 per barrel for 2019.