The oil risk premium shoots up
Add Axios as your preferred source to
see more of our stories on Google.
Oil prices are back to the high levels of March as investors price in the growing risk that the Iran war will escalate.
Why it matters: Higher energy prices ripple through the entire economy, pushing up inflation.
- The recent rise in oil has also put stocks under pressure: Both the S&P 500 and Nasdaq declined last week as prices climbed.
Where it stands: On Sunday night, when the oil market opened, the price of a barrel of Brent crude for December delivery fell slightly to $115 — after closing in the previous trading session at its highest price since April.
Catch up quick: Just over the last week, the price had already spiked nearly 7% in reaction to reports that the U.S. and Israel plan to restart attacks after the midterms.
Between the lines: The gains appear to be due to what energy analysts are calling a "geopolitical risk premium." That's because the supply of oil from the Persian Gulf region is nearly back to pre-war levels, according to September data analyzed by Robin Brooks, an economist at the Brookings Institution.
- And demand hasn't moved up in any meaningful way.
- "A very large" risk premium is getting priced in, Brooks wrote.
- "Oil is once again flowing from the Middle East," JPMorgan commodity analysts wrote in a note last week.
The intrigue: JPMorgan's pricing model puts Brent's fair value at just $94 per barrel, given the supply-demand dynamics in the market.
- Yet Brent is trading about $20 higher.
Context: These are "futures" prices — investors are valuing what they think a barrel of oil for delivery would go for in December 2026.
- The price reflects "what the market is willing to pay for the possibility that tomorrow's supply may once again be disrupted," the bank noted.
What to watch: Under the hood, there's another dynamic at play that's not showing up in the benchmark price: Soaring shipping costs are driving a wide disparity in the prices that buyers pay for oil around the world, the JPMorgan analysts said.
- Before the war, the price of crude oil in different regions used to more closely track the benchmark, which doesn't include shipping costs.
- Now, there are wide differences as some producers actually lower the price of oil to compensate refiners for high freight costs and to keep them buying.
How it works: For example, oil bound for Asia averaged $93 per barrel before shipping in October, down from $106 in April. But its delivered costs rose to $131 from $116.
- "Geography is reshaping the relative value of crude around the world," explained Natasha Kaneva, head of global commodities research at JPMorgan, on a podcast Friday.
