In a note to clients Tuesday, analysts at Wolfe Research assessed the "war premium" in oil prices, noting that today, the exercise is made simpler by the fact that the oil market is relatively balanced.
The investment firm states: "We know there is some "war premium" in oil markets because there are multiple conflicts in key producing regions."
Oil prices are influenced by demand momentum, inventory patterns, OPEC spare capacity, and non-OPEC supply growth, usually led by the US.
"A multi-variate statistical model to pin down [the] 'fair value' of oil doesn't work though, because there is always context within these inputs that distorts co-linearity," explains the firm.
Analysts argue that removing variables actually helps, and Brent prices in the 2010s have a tight correlation to the change in OECD inventories.
"Since the outbreak of the Ukraine war, OCED inventories are up and expected to be flat out to YE25, with the oil market largely in balance," adds the firm. "This suggests Brent prices should be around where they were at the end of 2021, or $75, and implying $10-$15/bbl of 'war premium.'"
"Using the 2010-2019 inventory correlation, ~$115 avg Brent price in 2Q22 implied a ~0.7MM bpd impact to Russian supply, while a 2MM bpd Russian supply outage implies ~$190/bbl Brent."
