Risk premium ‘to return to oil markets in 2017’

The risk premium in the price of oil is expected to return next year. That would be due to instability in the Middle East – with wars in Syria and […]

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By Priyanka Shrestha

The risk premium in the price of oil is expected to return next year.

That would be due to instability in the Middle East – with wars in Syria and Yemen against the Islamic State – combined with the balancing of supply and demand in oil markets later this year, according to a new report.

Consultant group IHS states a global oversupply of oil negated the market impact of political risk last year and oil prices did not rise despite Islamic State attacks in a number of countries.

However it forecasts global oil supply and demand to balance later in 2016 or early 2017 especially if disruptions continue, “which could well mean a turnaround in pricing – the adding of a risk premium to a tighter market”.

The degree by which the new risk premium impacts price is said to depend on developments in the Middle East as well as other key producing areas such as Venezuela and Nigeria showing potential for supply disruptions.

Carlos Pascual, Senior Vice President at IHS Energy said: “By 2017, oil prices could recover more than supply and demand by themselves would suggest—with a new risk premium on oil that reflects regional tensions. The global oil supply glut has been annulling the market impact of political risk.

“But as markets balance and with demand growth projected to outstrip supply gains next year, IHS Energy expects concerns over political risk could add a price premium to oil. Higher prices could give the region’s oil exporters a financial respite.”