According to daily headlines, the?premium built into crude oil prices due to tensions between Iran and the United States fluctuates. But there is a underlying assumption that all will be well.

Brent crude oil futures closed at $70.35 per barrel, a 4.4% increase. This is the highest price since January 30.

This increase is largely due to news reports stating that Iran and Russia are planning naval drills for Thursday in the Sea of Oman, and in the northern Indian Ocean. Just days earlier, 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 in the last 14 trading days and gained eight. This shows that it is not moving in a clear direction, but rather being driven by headlines.

The dollar amount of the "current risk premium" is still being debated, but it is generally agreed that the range is between $7 and $10 per barrel.

This premium reflects the possibility that the talks between Washington, D.C. and Tehran will end in failure and that President Donald Trump may decide to launch military strikes. It is also possible that Israel would join the attack on Iran.

The premium is small enough that it reflects the fact that the market does not expect any disruption in the supply of crude oil through the Strait of Hormuz. About 20% of the global daily volume transits through this Strait.

This belief is based on past experience. Conflict in the?Middle East has seldom led to major or sustained supply interruptions.

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

SCENARIOS

Priced for two possible scenarios, the crude market currently reflects current prices.

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, most likely relating to the oversight of Iran's nuclear program and its limitation in exchange for a certain amount of sanctions relief.

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

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

Markets are not pricing in the possibility that Iran decides to go all-in, launching "attacks" on oil infrastructure throughout the Gulf region with the goal of raising prices.

It is believed that Trump would not tolerate a sustained increase in crude oil prices, particularly as he prepares for what will likely 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 try to buy time.

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

You like this column? Open Interest (ROI) is your new essential source of global financial commentary. ROI provides data-driven, thought-provoking analysis on everything from soybeans to swap rates. The markets are changing faster than ever. ROI can help you keep up. Follow ROI on LinkedIn, X.

These are the views of the columnist, an author for.

(source: Reuters)