(Multibagger) - Goopolitical risk premium gauges in the oil market have decreased slightly this week, following sharp increases last week in both Brent implied volatility and call options implied volatility skew, Goldman Sachs said.
Oil prices steadied in Asian trading as traders weighed developments in the Middle East conflict against continued bearish expectations for demand.
futures last traded at $77.72 a barrel, up 0.7%, as of 0612 GMT.
Prices had plunged more than 4% in the previous session on a possible Hezbollah-Israel ceasefire. [O/R]
Goldman Sachs still expects a peak upside of $10-$20 per barrel for Brent in the case of disruptions in Iranian production as the development of the conflict remains uncertain.
However, in the absence of major disruptions, prices could stabilize around current levels this quarter, the bank said in a note dated Tuesday.
The call options implied volatility skew jumped to mid-April levels last week, while Brent implied volatility surged above its model-implied fair value for the first time this year, Goldman said.
"Options markets are pricing in a roughly 5% probability of a $20/bbl price jump, which we estimate roughly corresponds to a 2 million barrels per day 6-month interruption without an OPEC offset, occurring within the next month," the bank said in a note last week.
The market uses implied volatility to estimate the likelihood of a security's future price changes.
Analysis:
In summary, Goldman Sachs has reported a decrease in geopolitical risk premium gauges in the oil market. This comes after sharp increases in implied volatility and options skew last week. Oil prices have steadied in Asian trading, but developments in the Middle East conflict continue to influence market sentiment. The bank still expects potential upside for Brent prices in the case of disruptions in Iranian production, while prices could stabilize if major disruptions do not occur. The market is pricing in a probability of a significant price jump, indicating uncertainty in future price movements.