Geopolitical risk premium in oil market slips slightly, Goldman Sachs says

Geopolitical risk premium gauges in the oil market have decreased slightly this week, following sharp increases last week in both Brent implied volatility and call options implied volatility skew, Goldman Sachs said.

Oil prices steadied in Asian trading as traders weighed developments in the Middle East conflict against continued bearish expectations for demand.

Brent crude futures last traded at $77.72 a barrel, up 0.7 per cent, as of 0612 GMT.

Prices had plunged more than 4 per cent in the previous session on a possible Hezbollah-Israel ceasefire.

Goldman Sachs still expects a peak upside of $10-$20 per barrel for Brent in the case of disruptions in Iranian production as the development of the conflict remains uncertain.

However, in the absence of major disruptions, prices could stabilize around current levels this quarter, the bank said in a note dated Tuesday.

The call options implied volatility skew jumped to mid-April levels last week, while Brent implied volatility surged above its model-implied fair value for the first time this year, Goldman said.

“Options markets are pricing in a roughly 5 per cent probability of a $20/bbl price jump, which we estimate roughly corresponds to a 2 million barrels per day 6-month interruption without an OPEC offset, occurring within the next month,” the bank said in a note last week.

The market uses implied volatility to estimate the likelihood of a security’s future price changes.