Oil prices get 'fear premium' spike

A growing ‘oil bubble’ is becoming more serious a threat to the global economy than European weakness, according to head of the IMF. And these are market speculators who are enlarging the bubble, even though there is no threat of an oil shortage.

“It’s obvious that Europe is no longer in the focus of everybody’s attention,” Christine Lagarde says.

Today the prices for oil are spinning upwards, with Brent Crude now being traded at $124.5/bbl and WTI standing at about $106.6/bbl.

Geopolitical factors have become a major player in the oil market, Sergey Vakhromeev, a senior analyst at Metropol, told Business RT. The fears over disruptions of oil deliveries from Iran, as well as political unrest in the Middle East, make investors bid higher.

Today “around $20 to $25 in the current oil price is a “fear premium,” Vakhromeev specified.

Meantime, there’s enough oil for everybody in the world, as Saudi Arabia, for example, could easily compensate for the possible loss of Iranian oil, the Metropol expert said.

Also experts don't expect Iran to close the Strait of Hormuz anytime soon. "Iran is still tightened to the world of trade despite US measures there are still countries that buy its crude. Right now I don’t think they will attempt to close the Strait", Jorge Montepeque is Platts' Global Director of Markets Reporting told RT.

He stressed: "Of course closing it isn’t an easy thing to do. We have been there 20 years ago during Iran-Iraqi war and the Strait was never fully shut down."

Last week the country tried to “scare prices lower” – to a more sustainable level of $100/bbl for Brent -, saying it was ready to ramp up production. Saudi Arabia wanted to stress that “the market is actually currently oversupplied and that inventories are rising,” said Chris Weafer, a chief strategist at Troika Dialog.

“The country fears the price is being pushed higher by speculators playing the expanding risk premium, and that the higher the price rose the greater the risk of a 2008-style collapse,” Weafer specified.

In July 2008, the price of oil hit a record high of over $147 a barrel and then nosedived.

“For the Russian investment case, it can certainly be argued that $100-110/bbl Brent is a good compromise”, as it’ll drag the country’s budget into deficit, Weafer added. But after a broader look, one can see “that would be a better investment backdrop for Russia,” as well as major oil importers.

“Russian equities and the rouble would weaken if Brent were to fall quickly from $125 to $110 or $115/bbl. If the price stabilized there, it would be a strong buying opportunity for GEM [global emerging markets] and Russia,” Weafer concluded.