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Crude’s $25 War Premium Could Rapidly Decline: BNEF

OIL

BNEF estimate a war premium of $25/b already embedded in oil prices even before Iran’s retaliatory strikes.

  • Crude prices usually have an inverse relationship with inventory levels, and given the supply/demand balance, current Dated Brent values should be closer to $66/b without the heightened geopolitical risks.
  • However, this varies from a more common estimate among analysts of only a $5/b geopolitical risk premium at its height following Iranian retaliatory strikes. These estimates put Brent at around $85/b looking at only supply and demand.
  • BNEF added that any escalation in the conflict could drive that risk premium up by a further $5-$10/b.
  • However, any de-escalation should cut the risk premium by $10-$15/b from current levels.
  • The geopolitical risk premium averaged $11/b in Q1, according to BNEF estimates.
  • BNEF’s calculations assume r-squared - for variance of price determined by inventory levels – at 0.71 and based the model on quarterly average oil prices.

Source: Bloomberg

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