The Price Of Oil Is A Poor Tracker Of Geopolitical Risk, Says Bank Of America Analyst

The price of a barrel of oil hit a two-year high in reaction to Saudi Arabia's anti-corruption purge, which saw the arrest of well-known billionaire investor Prince Al-Waleed bin Talal.

The Analyst

Bank of America Merrill Lynch's head of global commodities Francisco Blanch.

The Strategy

Buying oil amid geopolitical risks and concerning headlines may be a mistake, Blanch said. 

The Thesis

The price of oil has been trading near the $50 mark for most of 2017 but has now jumped above $60 per barrel, mostly due to Saudi Arabia's anti-corruption purge. Investors are now questioning if the price of oil is fully factoring in geopolitical risk, or if the commodity should trade higher. The short answer: oil is bad at pricing in geopolitical risk, Blanch said. 

From a historical point of view, the price of oil has shown the opposite correlation many would expect, Blanch said as a guest on "Bloomberg Daybreak: Americas." The price of oil rose steadily in the months prior to the 2003 Iraq war and then plunged after President George W. Bush issued a final ultimatum, even though it was known that former Iraqi dictator Saddam Hussein ordered the country's oil wells to be fitted with explosives.

"Until something really big happens and violence affects the oil fields, it is very hard for oil prices to really pick up a lot of geopolitical risk," he said.

Price Action

Brent Crude (ICE) lost 0.58 percent to trade at $63.90 as of 10:55 a.m. Tuesday.

WTI Crude Oil (Nymex) lost 0.37 percent to trade at $57.14 as of 10:55 a.m. Tuesday.

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