Oil’s geopolitical risk premium is still there
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Yawen Chen
LONDON, Nov 27 (Reuters Breakingviews) -Israel and Hezbollah’s peace deal is a key step on the path to a calmer Middle East – and, in theory, lower oil prices. On Tuesday, the U.S. and France managed to broker an agreement which reduces one aspect of crude’s geopolitical risk premium. But Iran and Donald Trump’s presidency are significant and ongoing countervailing forces.
The ceasefire leaves Benjamin Netanyahu in a powerful position. The Israeli prime minister’s war has severely damaged the capabilities of Hezbollah, Iran’s most powerful militant proxy. And Trump, a staunch supporter of Israel, is about to take over as U.S. president. In theory, the pair could use the latest step forward to forge other pacts across the region – for example by striking a deal with Saudi Arabia.
That sounds like a recipe for lower oil values. Crude prices had already retreated from $92 a barrel when Israel’s separate war in Gaza erupted in late 2023 to current levels of $70 a barrel. And in big picture terms, there’s scope for it to fall further. Earlier in November, the Organization of the Petroleum Exporting Countries and its allies like Russia (OPEC+) cut its global demand growth estimates to 1.54 million barrels per day, the fourth such cut this year. Meanwhile, OPEC+ is grappling with huge volumes of spare capacity. Rystad analysts reckon oil prices could fall to as low as $50 a barrel if the cartel decided to unwind their output cuts.
All that said, the geopolitical risk premium hasn’t gone away. Israel, the U.S. and Arab nations still need to devise a strategy for what to do next in Gaza. And the current situation makes it easier for Trump to deploy his “maximum pressure” tactics on Iran, which include applying harsh sanctions on the Islamic Republic when he takes over in January. If that happens, there’s a risk that Iran’s 1.7 million barrels of daily oil exports sink to much lower levels. There’s also the danger that Tehran makes it harder for transit via the Strait of Hormuz, through which a fifth of daily oil consumption passes. While this risk remains, crude prices will stay higher than the supply-demand fundamentals might suggest.
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CONTEXT NEWS
A ceasefire between Israel and Iran-backed group Hezbollah took effect on Nov. 27 after both sides accepted an agreement brokered by the United States and France on Nov. 26.
The accord cleared the way for an end to a conflict across the Israeli-Lebanese border that has killed thousands of people since it was ignited by the war in Gaza in October 2023.
A ceasefire proposal agreed to by Lebanon and Israel stipulates that only “official military and security forces” in Lebanon are authorised to carry arms there, according to a copy of the deal seen by Reuters.
Israel will gradually withdraw its forces over 60 days as Lebanon’s army takes control of territory near its border with Israel to ensure that Hezbollah does not rebuild its infrastructure there, U.S. President Joe Biden said on Nov. 26.
Iran welcomes the ceasefire in Lebanon, the country’s Foreign Ministry spokesperson Esmaeil Baghaei said in a statement on Nov. 27.
Brent crude futures rose 0.4% to $73 a barrel by 0750 GMT on Nov. 27.
Graphic: Oil’s geopolitical risk premium has faded since the Gaza war https://reut.rs/3B2rIb6
Editing by Aimee Donnellan, Streisand Neto and Oliver Taslic
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