Crude oil should be pricing in about $12 in geopolitical supply disruption risk: energy expert

Clay Seigle, global oil service director at Rapidan Energy Group, joins BNN Bloomberg to talk about the main geopolitical risks for the oil market. Seigle says there is a 30 per cent chance Iran becomes directly involved in the Middle East war, which in turn could result in a $40 spike in crude prices. However he says right now we’re seeing “virtually zero” geopolitical risk premium built into the price of oil.

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OIL WATCHERS CONTINUE TO MONITOR TENSIONS IN THE MIDDLE EAST. THE U.S. AND U.K. LAUNCH MORE AIR STRIKES IN YEMEN OVERNIGHT. LATEST MOVE IN THEIR EFFORT TO STOP ATTACKS BY THE IRAN BACKED COUP FEES IN THE RED SEA. THIS FRESH ROUND MARKING AN 8TH ALLIED

ATTACK ON WHO THE SINCE JANUARY 12TH AND THEY WERE SUPPORTED BY A A BROADER GROUP OF COUNTRIES, THOSE ALLIES THAT IS INCLUDING CANADA. OUR NEXT GUEST SAYS THE ENERGY MARKET MAY STILL BE MISPRICING THE RISK OF A MAJOR OIL SUPPLY DISRUPTIONCAUSED BY CONFLICT

IN MIDDLE EAST. LET’S BRING IN CLAY SIEGEL FOR MORE. HE’S GLOBAL OIL SERVICE DIRECTOR AT RAPIDAN ENERGY GROUP. ENI JOINS US FROM HOUSTON. GREAT TO HAVE YOU WITH FIRST OFF, MAYBE YOU CAN PUT INTO CONTEXT WHAT IS HAPPENING IN THESE

LATEST AIR STRIKES AND WHAT THE U.S. AND U.K. ARE ARE SEEKING TO ACHIEVE HERE. >> WELL, GOOD MORNING AND THANKS FOR HAVING ME. I THINK THAT YOU HAVE IT EXACTLY RIGHT IN THE MARKET IS MISPRICING THE RISKS OIL SUPPLY AND GAS SUPPLY DISRUPTIONS EMANATING

FROM THE GROWING CONFLICT IN THE MIDDLE EAST. AND IT IS CONTINUING TO SPREAD THESE ATTACKS SHIPPING, DESPITE THE FACT THAT THE UNITED STATES AND U.K. ARMED FORCES HAVE UNDERTAKEN A CAMPAIGN TO DEGRADE IVEY’S HOUTHI CAPABILITIES TO ATTACK SHIPPING AND ALSO TRIED TO

DETER THEIR DECISION MAKERS FROM UNDERTAKING ADDITIONAL ATTACKS. BUT THOSE ATTACKS HAVE CONTINUED, AS YOU SAID, OVER THE PAST WEEK OR 2, THERE’S NO SIGN THAT THE CAMPAIGN TO HALT THESE ATTACKS ON SHIPPING IS LIKELY TO SUCCEED SOON. SO WHAT THAT

MEANS IS THAT OIL SUPPLIES AND GAS SUPPLIES ARE LIABLE TO CONTINUE BEING REDIRECTED INSTEAD OF BEING ABLE TO USE THE SHORTCUT. THAT IS THE RED SEA CONNECTING EASTERN AND WESTERN HEMISPHERE. ENERGY MARKETS ARE PROBABLY MORE AND MORE EVER GOING TO HAVE TO

TAKE THE LONG WAY AROUND THE SOUTHERN TIP OF AFRICA. IT DOESN’T EXACTLY REMOVE OIL FROM THE GLOBAL MARKET, BUT IT INCREASED COSTS BECAUSE I TANKER CAPACITY IS LIMITED. SO THESE LONGER ROUTES ARE GOING TO INCREASE THE COST OF FREIGHT FOR OIL AND GAS

SHIPPING. AND FOR THOSE GUYS THAT ARE STILL CONTINUING TO USE THE RED SEA SHORTCUT, THEY’RE GOING TO PAY HIGHER INSURANCE COSTS BECAUSE OF THE WAR PREMIUM RISK IN THAT REGION. >> SO IS IT YOUR VIEW THAT THE AIRSTRIKES THAT WE HAVE SEEN

IN YEMEN WILL NOT ULTIMATELY SERVE AS THE DETERRENT NEEDED TO END THE SEE ACTIVITY, THE RED SEA ATTACKS. >> WELL, THAT’S THE KEY QUESTION. THIS DESIGNED TO CHANGE THE INTENTIONS OF THE OPPOSING FORCE, WHICH IS THEIR DESIRE TO ATTACK SHIPPING NOW

FROM THE CREW OWN SPOKES PEOPLE. THEY’VE SAID THAT AS LONG AS THE ISRAELI MILITARY CAMPAIGN IN THE GAZA STRIP CONTINUES THEIR ATTACKS ON SHIPPING RELATED TO ISRAEL ARE GOING TO CONTINUE. AND OF COURSE, WE’VE SEEN ATTACKS ON SHIPPING THAT SEEMED TO HAVE

NO CLEAR LINK TO WHAT’S GOING ON IN ISRAEL. BUT I JUST WANT TO EMPHASIZE THAT THE MAIN RISK FOR OIL MARKETS IN THIS WHOLE MIDEAST CONFLICT IS THE POTENTIAL FOR IRAN, THE SPONSOR OF THE AND HAMAS AND HEZBOLLAH IN LEBANON TO BECOME

DIRECTLY INVOLVED IN THE FIGHTING, EITHER AGAINST ISRAEL AND OR AGAINST THE UNITED STATES. THAT’S ONLY A 30% PROBABILITY, BUT IT WOULD BE LIKE A $40 SPIKE IN THE PRICE OF CRUDE OIL. IN OUR ESTIMATE. SO A 30% RISK RATING

ON A $40 EVENT SHOULD BE ABOUT $12 OF GEOPOLITICAL SUPPLY, DISRUPTION, RISK IN THE PRICE OF OIL. SO FAR, WE’RE NOT SEEING IT SO FAR, THERE’S VIRTUALLY 0 GEOPOLITICAL RISK PREMIUM BUILT INTO THE PRICE OF OIL. BUT WATCH FOR THE

POTENTIAL FOR IRAN TO BECOME DIRECTLY INVOLVED, ESPECIALLY IF ISRAEL STARTS TO PIVOT AND TURNS. IT CITES FROM TARGETS IN THE GAZA STRIP, 2 PUSHING HEZBOLLAH IN SOUTHERN LEBANON AWAY FROM THAT BORDER REGION. THAT’S THE KEY FLASHPOINT TO WATCH. WE THINK FOR ENERGY

MARKETS IN THE NEW YEAR. SO THE THE RISK OF FURTHER ESCALATION, PERHAPS NOT IN YOUR OPINION OR OR OR YOU CAN NOT FULLY FACTORED INTO THE PRICE OF OIL RIGHT NOW, WHICH COULD BE A A BULLISH INDICATOR. >> BUT HOW DO WE EVEN

DETERMINE THE LIKELIHOOD OF FURTHER FURTHER AGGRESSION? I MEAN, THERE ARE THOSE WHO WOULD SAY THERE’S A LOT AT RISK FOR RON IF IT WERE TO ESCALATE BEYOND WHERE WE ARE TODAY. >> WE WOULD AGREE WITH THAT ASSESSMENT. WE WE ESTIMATE THAT THE BASELINE

CONSIDERATION IN TEHRAN IS TO NOT ESCALATE INTO A FOR REGIONAL CONFLAGRATION. THEY ALSO HAVE AN INTEREST IN IRAN IN NOT BECOMING DIRECTLY INVOLVED IN THE LOSSES, THAT THAT WOULD INCUR. AND THEY ALSO DON’T NECESSARILY WANT TO PLAY THE FULL HEZBOLLAH CARD

THAT THEY HAVE IN THEIR POCKET THAT SERVES AS A POWERFUL DETERRENT ISRAEL AND ISRAEL EXPANDING ITS WAR IN THE DIRECTION OF LEBANON. WE THINK THEREFORE, THAT THE MAJOR RISK OF A BLOW UP THAT WOULD AFFECT ENERGY MARKETS COMES THE RISK

OF MISCALCULATION OF THE SIDES MISSED COMMUNICATING THEIR INTENTIONS OF PUSHING THE ENVELOPE A LITTLE TOO FAR AND NOT ANTICIPATING UNINTENDED CONSEQUENCES. A LOT OF TIMES THAT’S HOW THESE IN HISTORY HAVE HAVE TENDED TO GET OUT OF CNTROL. AND THAT’S THE RISK

HERE TODAY. AND 2024 IN THE MIDDLE EAST. NOW JUST TO COME BACK TO THE PRICE OF OIL ITSELF, PLAY THE THE NARRATIVE OF THE MARKET TODAY SEEMS TO BE WE FOR THIS A FEW TIMES. >> WTI RIGHT NOW IS MODESTLY

HIGHER ON THE DAY, BUT THAT THERE ARE THESE BROADER OVERSUPPLY CONCERNS THAT ARE OVERSHADOWING. THE POTENTIAL OF MORE DESTRUCTION TO FLOW THROUGH THE MIDDLE EAST. WHAT DO YOU MAKE OF SOME OF THE HEADLINES ON THE WORLD BEING AMPLY SUPPLIED WITH OIL. AND

THAT’S SOMETHING THAT HAS BEEN WEIGHING ON THE PRICE. WELL, AT RAPIDAN ENERGY GROUP, WE CONCUR WITH THOSE ASSESSMENTS, ALTHOUGH WE’RE STILL EXPECTING A LITTLE BIT OF A GLOBAL OIL DEFICIT. >> IN THE 1ST QUARTER OF THIS YEAR, THIS YEAR LOOKS TO BE

PRETTY WELL SUPPLIED AND BALANCED DEMAND AND SUPPLY. SO ALTHOUGH DEMAND WILL GROW OVER THE NEXT COUPLE YEARS BY ABOUT 2 AND A HALF PERCENT, 2 AND A HALF MILLION BARRELS A DAY DURING THAT TWO-YEAR PERIOD THAT THE FRONT END OF THAT. I

LOOK PERIOD LOOKS LOOKS A LITTLE BIT LOOSE. IT LOOKS A LITTLE BIT SLOPPY AND NEW SUPPLY GROWTH FROM THE PRODUCERS HAS BEEN PRETTY ROBUST. IT’S UP A SURPRISED A LOT OF MARKET OBSERVERS TO THE UPSIDE IN THE 2ND HALF OF LAST

YEAR. AND IT LOOKS LIKE WE’LL BRING ON ANOTHER MORE THAN A MILLION BARRELS A DAY OF NON-OPEC SUPPLY GROWTH AS WELL. SO THE TOUGH NEWS FOR KIND OF THE OPEC+ PRODUCERS COALITION IS THERE GOING TO HAVE TO KEEP SUPPLY LOWER FOR

LONGER? YOU KNOW, THE TODAY THOUGHT THAT THAT PERIOD OF TIME WHEN THEY NEED TO KEEP THOSE SUPPLY CUTS IN FORCE TO BALANCE THE MARKET WOULD MOSTLY BE A 2023 STOREY, 2ND HALF OF 23. BUT OUR ANALYSIS CONCURS WITH WHAT YOU HAD

WITHIN THE QUESTION. IT’S GOING TO BE A PRETTY LOOSE OIL CERTAINLY IN THE 1ST HALF OF THIS YEAR. BUT ACTUALLY THROUGH THE END OF NEXT YEAR. OPEC+ IS PROBABLY GOING NEED TO KEEP SOME SUPPLY CUTS, SOME SUPPLY CURTAILMENTS IN FORCE

IN ORDER TO PREVENT VERY LARGE SURPLUSES