Enverus Intelligence Research (EIR) has introduced a new measure of geopolitical risk which it says is designed to gauge oil market sentiment and understand prices beyond fundamental forecasts.
According to the EIR, the company can now project not only global oil supply, demand and inventories, but also explain the deviation of forecast oil prices from its fundamental outlook based on a sentiment score generated by a proprietary algorithm powered by open source keywords.
The company says the new index allows it to estimate the geopolitical premium or discount to oil prices and adds that it can be useful for market participants such as oil options traders, price hedgers oil and geopolitical observers.
“By quantifying the geopolitical premium, we estimate the extent to which a risk differential is warranted relative to fundamental price expectations,” EIR director Bill Farren-Price said in a statement sent to Rigzone.
“The current geopolitical premium has eroded significantly as Brent appears to have stabilized around the $100/barrel mark – a value that we believe is fundamentally justified. The geopolitical premium peaked when Russia invaded the Ukraine and Brent touched $139 a barrel,” Farren-Price added in the statement.
Looking back historically, Arab Spring tensions led to a price premium of $10-15 a barrel in 2012-2013, drone attacks on Saudi Arabia’s Abqaiq-Khurais facility led to a premium of around $10 a barrel in 2019 and an anticipated rebound in demand from Covid-19 equated to nearly $20 a barrel, EIR pointed out.
The price of Brent crude oil has been fluctuating over the past few weeks. The commodity closed at $100.85 a barrel on March 1, $127.98 a barrel on March 8, $98.02 a barrel on March 16, $121.6 a barrel on March 23, $98.48 a barrel on April 11, $113.16 a barrel on April 18 and $104.97 a barrel. May 3. As of this writing, Brent was trading at $108.78 per barrel.
Oil broke above $100 a barrel for the first time in years in February as Russian forces escalated a conflict with Ukraine.
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