Abhishek Deshpande, Research Analyst at Natixis, explains that oil markets are balancing in alignment with fundamentals, according to their analysis and Geopolitical risk premiums are not priced in completely in the event of major disruptions. 

Key Quotes

“The risk of US oil output increasing is high but equally the slowdown in well completion could put brakes on excessive growth in US oil production output.”

“Hedging from sovereign states and producers could increase well before the OPEC meeting as risk managers take advantage of every possible price rally.”

“Markets are balancing in alignment with fundamentals, according to our analysis. However, with limited geopolitical risk premium being priced in right now, the strikes in Syria serves as an example of how quickly the situation in the Middle East or, for that matter, some other vulnerable oil states could change and affect the markets.”

“US completion month-on-month growth rates are likely to slow down despite increases in drilling, as clearly indicated in the rig activity report from the EIA.”

“We could see some potential hedging opportunity for sovereign states including the well-known Mexican annual hedging. Any price spike could incentivise sovereign states and potentially even producers to increase their hedged volumes this year earlier rather than later. In our view, for producers, oil hedging is a part of risk management and they should make good use of every rally seen between now and the OPEC meeting to lock in some of their output in the event of oil prices collapsing.”

“But equally, if OPEC were to continue their cuts and if we were to see withdrawals as per our central scenario expectation, then we could see some losses for those hedges. But these losses would be minimised by the gains in oil prices anyway as we expect oil prices to trend towards $65/bbl in our central scenario.”