Oil has historically had a risk premium attached to its price. But since the shale revolution and OPEC’s decision to flood the market with oil, that premium has been nearly nonexistent.
That is about to change as risks in the Middle East, particularly centered around Iran, come to the forefront again.
In my last MarketWatch articles, I discussed why I believe oil is likely headed back to $100 per barrel in the next few years. The primary drivers will be slowly increasing demand as well as declining rates of production in existing wells that won’t be replaced due to massive cuts in capital expenditures. While those slow-moving forces are nearly certain, a sharp rise in risk premium is also becoming very likely.