Risk reversions in the euro-dollar forex option market tell me Planet Forex is unwinding the excessive fear premium
embedded in upside US dollar protection strategies.
That's higher than what we envisioned earlier this year," he says, "but it factors in the fear premium
that is now reflected in crude oil prices.
The fear premium
in oil markets may significantly rise and increase oil prices by 20%, leading to negative growth effects in the US, Europe, Japan, China, India and all other advanced economies and emerging markets that are net oil importers.
Analysts said a fear premium
was in place due to ongoing tensions in oil-producing regions of North Africa and the Middle East and the recent death of Al-Qaeda leader Osama bin Laden.
Some economists argue that a fear premium
may be factored in the oil price for some time.
All signs point to there being a one-for-one substitution so far in terms of barrels, but even so, that doesn't take into account the market impact from a reduction in the quality of those substituted barrels, as well as a fear premium
Jeff Brown, managing director of Facts Global Energy in Singapore, said: "There's always a fear premium
The fear premium
was boosted by the threat of conflict in the Middle East triggering another wave of fund inflows in the futures market.
Also, with ongoing tensions in the Middle East which could be translating to as much as a $20 per barrel fear premium
in the price of oil (now over $100 per barrel), operating expenses for property will not be letting up.
The tension between the West and Iran over Tehran's nuclear programme will keep the fear premium
on WTI and Brent high through the coming months.
In case of a western embargo, the psychological, fear premium
would definitely go up.
And we think that the fear premium
in oil prices will come down as the situation in Libya improves.