Shift in oil trade suggests risk premium amid US, Israel, Iran tensions
Something other than normal hedging is at work, and there is serious speculation that Israel and Iran are heading for direct armed conflict
The price of oil usually moves inversely with the implied volatility of oil options. Oil producers are the main buyers of price hedges, and they hedge their downside risk more aggressively. When the oil price drops, they buy more options.
That pattern is evident during most of the past two years. It shifted noticeably, though, over the summer of 2018. The most recent increase in oil price was accompanied by a rise in the implied volatility of oil options.
This suggests that something other than normal hedging is at work, namely, a geopolitical risk premium. The threat of an interruption in supply prompts market participants to buy physical oil as well as to buy options.
There are any number of reasons why such a risk premium might have appeared during the last several months, including the Trump Administration’s attempt to shut Iran out of the world oil market, as well as serious discussion of a prospective war between Israel and Iran.
Efraim Inbar is a cautious, mainstream conservative Israeli academic. That he wrote on Friday a direct armed conflict between Israel and Iran is inevitable is something to take seriously.