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WHY THE OIL MARKET’S ‘RISK PREMIUM’ HAS DISAPPEARED — FOR NOW
11/1/2019 12:00:00 AM

Oil traders aren’t ignoring risk, they’re just more attuned to fears of an economic slowdown as a result of President Trump’s trade war than they are to the danger of supply disruptions that could result from Middle East tensions.

At least that might help explain why oil futures were so quick to give back a price spike that followed a September missile attack on Saudi Arabian oil processing facilities that knocked more than 5 million barrels a day of production temporarily offline.

While the kingdom was quick to restore output, the incident was seen robbing the Saudis of the ability to provide the spare capacity that would provide a cushion to global supplies in the event of future disruptions, not to mention that the incident also laid bare the vulnerability of the world’s swing crude producer to attack.

Indeed, the lack of a more lasting risk premium is a question that’s perplexed traders since the attacks. Caroline Bain, chief commodities economist at research firm Capital Economics, dug into the numbers in an attempt to quantify how risk factors were being incorporated into oil prices.

The exercise found that based on market fundamentals, oil prices should be higher than they are right now. In other words, instead of a risk premium, oil is trading with a “risk discount”.

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