Crude Oil prices continue to rally as tensions in the Middle East come to a boil. Strategists at TD Securities analyze Oil’s outlook.

Expanded conflicts have resulted in substantially larger rallies

Since 1981, we find that geopolitical risks have faded as soon as one month after the start of a conflict. In most cases, the premium had completely evaporated by six months. Interestingly, we also see a more prolonged weakness in prices thereafter, suggesting that the ensuing Oil shocks may have been associated with subsequent macroeconomic headwinds or increases in supply. However, expanded conflicts have resulted in substantially larger rallies.

For the time being, implied vols still remain well below that experienced in more recent analogies, although price action is thus far consistent with localized conflicts. This ties into notable increases in spare capacity, primarily within Gulf nations, that could potentially help to offset lost Iranian barrels or a tightening in US sanctions enforcement. Still, in such an event, global spare capacity would return to critically low levels, necessitating a risk premium nonetheless.