There’s a common perception that oil experienced a geo-political risk premium starting after 2001. While this cannot be quantified, I am not inclined to disagree.
But if such a premium moved in and out of oil from time to time in the past 7 years, it surely was not as influential as plain old supply and demand.
Now, however, things are changing. And especially so from current price levels. Moreover, it’s my view that the low price is creating as many tensions as the high price created in 2007 and 2008.
My central concern in 2009 is the potential for a collapse of an unstable petro state, like Nigeria, Venezuela. Perhaps even Iran. Another six months of prices at or below 40.00 would truly begin to erode domestic economies, and in most cases I would think political strife would affect production.
With many asset classes having just seen dislocation type moves of a historic nature, I think it’s time to consider that oil could be next. We have already seen in the space of one year, with oil, supply-demand driven moves to 147 and then to 34.
But what we’ve not seen with oil in many decades is a true, geo-political supply crunch. Oh we’ve seen risk of such priced in, as in Gulf Wars 1 and 2. But we’ve not seen actual supply bottlenecks.
That oil remains below 50.00 makes the price risk all the greater, as non-OPEC supply continues to get hammered. I would advise holding some form of protection, therefore, against a 25% to 100% swing in the oil price, should supply issues and war come together.
-Gregor
