Market Analysis

Geopolitical risk premiums in the oil market have slightly eased this week, after significant increases in both Brent implied volatility and the skew in call options implied volatility last week, according to Goldman Sachs.

Oil prices remained stable during Asian trading as traders assessed developments in the Middle East conflict, alongside persistent bearish demand forecasts.

As of 0612 GMT, Brent crude futures were trading at $77.72 per barrel, reflecting a 0.7% increase. This follows a more than 4% drop in the previous session due to reports of a potential Hezbollah-Israel ceasefire.

Goldman Sachs still predicts that Brent crude could see an upside of $10 to $20 per barrel in the event of Iranian production disruptions, given the ongoing uncertainty surrounding the conflict. However, in the absence of major supply disruptions, the bank expects prices to stabilize around current levels for the remainder of the quarter, according to a note from Tuesday.

Last week, the skew in call options implied volatility surged to levels not seen since mid-April, while Brent's implied volatility exceeded its model-implied fair value for the first time this year, the bank reported.

Goldman noted that the options market is currently pricing in a roughly 5% chance of a $20 per barrel price spike, which corresponds to an estimated 2 million barrels per day disruption over six months without OPEC intervention, occurring within the next month.

Implied volatility is commonly used by the market to gauge the likelihood of future price fluctuations in a security.

Paraphrasing text from "Reuters" all rights reserved by the original author.