There is a premium built into crude oil prices due to tensions between Iran and the United States. The headlines fluctuate daily, but there's an assumption that all will be well.

Brent futures, the global benchmark, rose 4.4% to $70.35 per barrel on Wednesday. This was their highest close since January 30.

This increase is mainly due to news reports that Iran and Russia will conduct naval drills on Thursday in the Sea of Oman, and in the northern Indian Ocean. Just days before, Iran's Revolutionary Guards had conducted exercises in Strait of Hormuz.

The military activity outweighed the positive remarks made by Abbas Araqchi on Tuesday, when he said that the Islamic Republic of Iran and the United States reached an agreement on the "guiding principles" for talks.

Brent fell six times and rose eight in the last 14 trading days, indicating that it lacks a direction and is driven by headlines.

The dollar amount of the current risk-premium is still being debated, but there is a consensus that it is between $7 and $10 per barrel.

This premium is based on the possibility that there will be no deal reached between Washington and Tehran and that President Donald Trump will decide to launch military attacks, with a high probability that Israel would also attack Iran.

The premium is small enough that it reflects the fact that the market does not expect any disruption in crude oil supplies via the Strait of Hormuz. About 20% of daily global volumes pass through this channel.

This belief is based on past experience. Conflict in the Middle East has rarely resulted in sustained or major supply interruptions.

It is in everyone's interest that crude oil continues to flow, even if missiles are fired and bombs are dropped.

SCENARIOS

The current crude oil market price is based on one of two scenarios.

First, there's a deal that Washington and Tehran have reached that prevents or delays a military conflict.

It would be likely to start as a limited agreement, with a focus on oversight and the limitation of Iran's nuclear program in exchange for some relief from sanctions.

Second, if there is no agreement and Trump decides that he will use the forces currently being built in the Middle East against Iran.

The market is still of the opinion that military action will not affect oil production or infrastructure.

Markets are not pricing in the possibility that Iran decides to go all-in, and launch attacks on the?oil pipelines across the Gulf? with the goal of driving up prices.

This is predicated on a belief that Trump cannot tolerate a sustained increase in crude oil prices, particularly as his Republican Party prepares for what are likely to be difficult mid-term elections.

Iran's leaders may decide that, if military action is inevitable against them, it's better to do maximum damage to the oil production in the region than accept a limited response and bide their time.

The oil market is likely to underestimate the likelihood of a serious escalation in tensions and a sustained disruption of crude supply.

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These are the views of a columnist who writes for.

(source: Reuters)