Oil: Five reasons for market resilience to supply shocks

Investing.com – Geopolitical noise, with fears of escalating tensions in the Middle East, and supply risks remain on investors' radar when it comes to the oil market. However, the commodity's resilience to supply shocks might be underestimated. During these periods, the risk premium is higher but temporary, reflecting uncertainty about potential supply issues in the region, a major global producer.

According to Julius Baer, the perception of greater dependency might be "outdated," as this market has become more resilient to supply shocks for several reasons, outlines Norbert Rücker, head of economics and next-generation research at the Swiss group, in a note released to clients and the market on Tuesday. Julius Baer sees prices falling below $80 per barrel due to ample supply and cooling sentiment, along with controlled production costs.

Ample available production capacity is among the reasons cited by Julius Baer. Amid production cuts by Middle Eastern players to artificially sustain prices, the market has a "decent cushion." The expert points out that available capacity is around 5% of the total oil supply.

More producer market options also bring greater resilience, with the United States being a major exporter, and expansion in Brazil and Guyana more than compensating for the decline in Venezuelan production. Besides these countries, Canada's pipeline is expected to bolster this market.

Chinese investment in oil infrastructure, expanding its storage capacity to a level higher than Europe's and refining capacity greater than America's, also provides greater comfort against shocks.

Oil stocks are broader amid declining demand in Europe and developed Asia, as well as stagnation in North America. "These storage levels seem even more comfortable from a relative perspective," highlights Julius Baer.

Additionally, the development of an alternative market gained momentum amid Western sanctions on Russia. "Russia, Iran, and Venezuela will always find willing buyers for their oil, depending on the discounts they offer," Rücker adds in the note.

On Tuesday afternoon, WTI Futures were up 3.15% to $80.17, and Brent Futures recorded an increase of 1.65% to $84.25.

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