Crude oil’s risk premium ebbs and flows

Crude oil’s risk premium ebbs and flows

Commodities 5 minutes to read
Ole Hansen

Head of Commodity Strategy

Key points

  • Crude oil continues to trade nervously with all eyes on the Middle East
  • While supply has not been disrupted, Israel-Iran tensions add a non-quantifiable risk premium
  • The managed money net long in WTI and Brent spikes to a six-month high

Crude oil prices continue to trade nervously with all eyes on the Middle East and what may happen next after Israeli military officials, despite EU and US calls for restraint, said their country had no choice but to respond to Tehran’s weekend strike. The tit-for-tat standoff between these two countries being just one of several developments currently supporting prices. While the Israel-Iran tensions add a non-quantifiable risk premium as supply has yet to be disrupted, energy prices are also being supported by a tight fuel product market driven by Russian refinery disruptions following recent Ukraine drone attacks, a firmer demand outlook for energy amid an improvement in manufacturing data in the US, Europe and China, and not least continued production restraint from OPEC+ producers. 

Overall, developments that have supported year-to-date price increases of more than 20% across the major crude oil and fuel product futures, thereby feeding a continued buildup in long positions held by hedge funds. The crude oil net long in WTI and Brent reached a six-month high last week, not least driven by Brent, the contract most exposed to international developments, which has seen the net long held by money managers reach a 2-1/2-year high above 300 million barrels, a tripling since early December, just before Houthi attacks on ships in the Red Sea helped raise the geopolitical temperature. With fuel products also in demand, the total crude and fuel net long position has reached a two-year high at 728,000 contracts.

With oil demand in 2024 expected to rise by around 1.5 million barrels a day - note the IEA expects 1.2 million barrels per day while OPEC analysts say 2.2 million barrels per day – the prospect for tightening market conditions into the second half will increase the focus on OPEC+ and their June meeting, when the group will decide whether to maintain production restraint, currently around 2 million barrels a day, or slowly begin to add barrels back into the market. 

In the short-term the risk premium will continue to ebb and flow, with focus on Iran’s oil production, currently running at a five-year high around 3.25 million barrels a day after the Biden administration stopped enforcing the sanctions that was put in place during the Trump presidency, and not least the continued safe passage of crude oil through the Strait of Hormuz, the world's most important energy chokepoint. The risk of a disruption remains limited but in a worst-case scenario some of the short fall can be met by another release of oil from US Strategic Petroleum Reserves or key OPEC producers holding a significant amount of spare capacity, deciding to turn up the taps. 

Brent crude oil has settled into a nervous trading range around USD 90, between USD 88.75 and USD 92, with news from Israel and Iran providing most of the intraday volatility. 

Source: Saxo

Commodity articles:

12 April 2024: Gold and silver surge at odds with other market developments
10 April 2024: 
Record breaking gold highlights silver and platinum's potential
5 April 2024: 
Commodity market sees broad gains, enjoying best week in nine months 
4 April 2024: 
What's next as gold reaches USD 2,300
3 April 2024: 
Q2 Outlook: Is the correction over?
3 April 2024: 
Cocoa: A 50% farmgate price boost a step in the right direction
27 Mar 2024: 
Crude oil maintains support amidst array of bullish signals
26 Mch 2024: Gold's behaviour points to sustained demand
20 Mch 2024: 
Attacks on Russian refineries lift risk premium and crude prices
19 Mch 2024: 
How to add copper exposure to your portfolio
15 Mch 2024: 
Commodity weekly: Green shoots seen across key sectors
13 Mch 2024: 
Lack of catalyst pushes crude into tightening range
8 Mch 2024: 
Commodity weekly: Gold and silver steal the limelight
8 Mch 2024: 
Investing with options - Gold optionality
6 Mch 2024: 
How to add gold exposure to your portfolio
6 Mch 2024: 
Video: What happened to the gold prices?
1 Mch 2024: 
Grains dip, cocoa soars, gold and oil see rays of strength: February’s commodity mix

Previous "Commitment of Traders" articles

15 April 2024: COT: Hedge funds propel multiple commodities positions beyond one-year highs
8 April 2024: 
COT: Speculative interest in metals and energy gain momentum
2 Apr 2024: 
COT: Gold and crude longs maintained amid strong underlying support
25 Mch 2024: 
COT: Hedge funds zoom in on crude, copper and silver
18 Mch 2024: 
COT: Hedge funds buying expands from precious metals to copper and grains
11 Mch 2024: 
COT: Specs rush back into gold, elevated yen short in focus
4 Mch 2024: 
COT: Underinvested speculators fuel gold's latest surge

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.