Why the oil market has not seen the doomsday scenario of an Iran war that experts have warned about

• US oil is trading at around $95 a barrel, well below the most dire price predictions during the Iran war.

• Goldman Sachs says three things have kept pricing stable.

• Oil experts break down why some of the most extreme scenarios haven’t played out.

Oil prices have not seen the dramatic rise that some had warned from the Iran war.

Crude futures are above prewar levels, but still below the more dire spikes that some forecasters predicted at the start of the war. Goldman Sachs attributed the flexibility to three factors: lower risk premiums, destocking, and arbitrage in spot purchases.

WTI oil was below $95 per barrel on Friday. Crude oil is sharply down from its wartime highs, and even President Trump said this week that he expects oil to hit $200 a barrel because of the conflict.

Prices held somewhat steady despite slight improvements in flows through the Strait of Hormuz, a critical waterway that handles about 20% of the world’s oil.

It is important to note that physical prices are higher than oil futures prices, but investors do not trade physical barrels, and the disconnect between physical and paper pricing reflects investors’ expectations that the war will end soon.

Still, oil has proven surprisingly resilient in the face of historic setbacks. Here’s what market professionals had to say why.

Investors are counting on Trump to quickly resolve the Iran war, and market valuations reflect that sentiment.

April 7 marked a turning point for financial markets, when Trump announced a temporary U.S.-Iran ceasefire and oil prices plunged. The initial truce signaled to investors that Trump was looking for an affront and was sensitive to market reactions.

Not only are high oil prices putting pressure on Trump to reach some sort of solution in the Middle East.

Tom Graf, Facet’s CIO, flagged that gas prices act as a key limit on how long the Strait of Hormuz can remain effectively closed, especially in a midterm election year.

The strategist told Business Insider that he believes oil prices have already peaked, but that gas prices, which the average consumer cares about, will rise further, pushing Trump to resolve the war.

It’s not just investors who are hoping for a quick fix. Neil Dingman, an energy analyst at William Blair, said it was “very telling” that exploration and production companies are not changing plans to add rigs, a sign that they do not expect the oil disruption to last more than a few months.

The draw for oil reserves has helped avoid worst-case predictions of supply shortages.

Nations and companies are pulling from their reserves in anticipation of flows through the Strait of Hormuz in the near future.

Vikas Dwivedi, global oil strategist at Macquarie Group, said global markets were in surplus ahead of the conflict and muted futures pricing moves. The strategist likened the move to “getting nice and fat in the winter.”

Another contributing factor is that the world economy is less dependent on oil than it has historically been, making crises less effective than past shocks.

Oil spot buying, which is buying physical oil for immediate delivery, has moderated, Goldman said.

Buyers are not afraid to buy oil now, hoping that normalization is coming, keeping a lid on demand.

Dwivedi said refiners buying crude oil are comfortable waiting a few months as they have some supply storage, which has helped cap the increase in futures prices.

He explained that the conflict overlaps with the maintenance season for global refiners, which makes it easier to curb purchases.

Another factor that may contribute to lower purchases is the destruction of demand, at least at the margin. The first signs of demand destruction are emerging in Asian markets that are increasingly dependent on oil flows from the Middle East.

Despite this trio of tempering forces, a future spike in oil could still happen, with experts warning of mid- to high-triple-digit levels. The Iran war has been largely unpredictable to date, so even if the aforementioned factors are constructive, investors should still be on the lookout for a tail-risk scenario.

Read the original article on Business Insider