Oil's Risk Premium

Oil is a difficult commodity. The position that oil commands, no other commodity can ever have.

The dual status of oil as an important commodity and proxy for global macroeconomic risk dates back to 1973-74 oil crisis, when OPEC waged an economic war against the West with crude as its weapon in support of the Arab attack on Israel. This elevated the commodity's profile to unprecedented heights on global stage. Since then, oil's price has reflected the forces of both supply and demand, and GLOBAL RISK PERCEPTIONS.

Nobody can determine how much risk premium does Oil command on any given day, but yes it does command increasingly more. Nearest to Oil as a significant global commodity was Gold. Yes, gold too is influenced by global risk, but gold has no strategic economic use. Jewelry and industrial demand are pricing factors for gold, but those applications are hardly critical in the global economy. Even if world sees Gold supply shortage, people simply can stop wearing & storing more gold. The only question is price, which is largely driven by sentiment and the vague memories that the metal was once used as legal tender.

At the moment, there's no shortage of risk fears. The challenge for the world is separating the Oil's risk-premium from the pure economic factors. This is inherently a speculative task and so no one can be confident that they understand how much of oil's price is affected by risk considerations vs. supply and demand analytics. Nonetheless, the biggest risk is underestimating, or ignoring the potential for an oil risk premium-which can and does fluctuate widely over time.