Geopolitical Risk Premium in Oil Market Dips Slightly, According to Goldman Sachs

Goopolitical risk premium indicators in the oil market have shown a slight decrease this week, following substantial increases in Brent implied volatility and call options implied volatility skew last week, according to Goldman Sachs.

Oil prices remained stable during Asian trading as traders evaluated the ongoing conflict in the Middle East alongside persistent bearish expectations for demand.

As of 0612 GMT, crude futures were last seen trading at $77.72 a barrel, reflecting a 0.7% increase. Prices had experienced a decline of more than 4% in the previous session due to speculation regarding a potential ceasefire between Hezbollah and Israel.

Goldman Sachs continues to predict a peak price surge of $10 to $20 per barrel for Brent crude if there are interruptions in Iranian production, though the situation remains unpredictable. However, without significant disruptions, the bank anticipates that prices could stabilize around current levels throughout this quarter.

Last week, the skew in call options implied volatility surged to levels seen in mid-April, while Brent implied volatility exceeded its model-implied fair value for the first time this year, according to Goldman Sachs.

The bank noted that the options market is currently pricing in approximately a 5% probability of a $20 per barrel increase, which they estimate aligns with a potential 2 million barrels per day interruption over six months, should it occur within the next month without an offset from OPEC.

Implied volatility is a market measure used to gauge the likelihood of future price changes in securities.