Oil’s Geopol Risk Premium Adding Further Challenge to Inflation Fight

The oil market’s geopolitical premium is elevating prices beyond levels determined by the current supply-demand balances, creating additional difficulties in combatting inflation.

Energy Intel estimated that around $5 of the Brent price was driven by a geopolitical risk premium, according to Senior Research Analyst Amena Bakr via X.

• Without the ongoing conflict in the Middle East and the fear of it widening, Rystad energy put Brent crude prices at around $85/b based on supply-demand fundamentals.
• With CPI for March coming in above expectations, prospects of a Fed rate cut have already been pushed back to July, with energy prices one of the drivers for above target inflation numbers.
• Energy prices rose 1.1% on a seasonally adjusted basis (vs. +2.3% prior), contributing approximately 8 basis points to monthly headline CPI growth.
• This geopolitical premium could further increase depending on Israel’s response to the Iranian drone attack: any disruption to flows via the Straits of Hormuz - a key chokepoint for 20% of oil flows - would also hamper freight and filter into delivered prices.
• As long as markets remains elevated by ongoing tensions, crude and product prices remain supported, keeping an additional hurdle to bring down inflation.