Rising Geopolitical Tensions and US Sanctions on Russian Crude Stoke Supply Concerns
The Israel-Hamas war is pushing up the oil market’s geopolitical risk premium, adding to an already tight 4Q outlook. November ’23 WTI gained $4.90/Bbl, or 5.8% this week, to finish at $87.69/Bbl. Escalating tensions in the Middle East, home to nearly a third of global oil supply, fueled oil’s rally, while stricter U.S. sanctions on Russian crude exports supported upside gains.
AEGIS maintains a bullish stance on oil prices. OECD inventories are currently 106 MMBbl below the five-year average, and further drawdowns are expected. OPEC+'s supply cuts should keep this market tight and reduce inventories.
Following Hamas's surprise attack on Israel, the U.S. and Qatar blocked Iran's access to $6 billion of its frozen oil funds. Amid reports of Iran's support for Hamas and its involvement in the recent attack, Iran's Foreign Minister warned that Tehran-backed militants might escalate the conflict with Israel. This situation raises fears of potential U.S. sanctions on Iran's oil or even direct Israeli retaliation, with potential disruptions to the global oil supply.
This week, Saudi Arabia and Russia reaffirmed their commitment to stabilizing the oil market and hinted at additional measures for next year. In its October monthly report, OPEC+ largely maintained a 3.3 MMBbl/d and 1.2 MMBbl/d deficit for the fourth quarter and for 2024, respectively.
Additionally, on Thursday, the U.S. sanctioned two oil tankers and their owners for transporting Russian oil above the $60/Bbl cap, marking the first time the U.S. has penalized market participants for such a violation. Russian oil's average export price rose to $81.78/Bbl in September. This U.S. action amplifies supply worries in a market already expecting global inventory drawdowns through 4Q2023.
Considering constrained OPEC+ supply, low inventories, tightening physical market, resilient demand, and geopolitical risk, AEGIS recommends hedging WTI using swaps, given the rally in the WTI curve in recent months. In the past, we favored hedging with costless collars.