Abundant oil supply dampens industry reaction to rising geopolitical tensions By Reuters

By Georgina McCartney and Liz Hampton

HOUSTON/DENVER (Reuters) – The oil industry and markets reacted weakly to rising tensions in the Middle East, a sign of how well-supplied oil supplies are as U.S. output rises and OPEC+ prepares to raise output.

The world oil benchmark rose 5 percent on Tuesday after Iran, a key producer and member of the Organization of the Petroleum Exporting Countries, attacked Israel in retaliation for its campaign against Hezbollah in Lebanon.

Brent settled just 2.6% higher at $73.56 on Tuesday, however, broadly in line with last week’s levels. Oil futures were up just 30 cents on Wednesday after the US reported a big rise in oil inventories. (OR)

The US pumps about 13.4 million barrels per day of oil and its production is expected to reach a record 13.49 million bpd by the end of the year, according to US government data. Meanwhile, OPEC and its allies, a group known as OPEC+, which has focused on cutting output from 2022, are set to start raising output later this year.

In the past, such an escalation of tensions in the world’s oil-producing regions would have been expected to have a larger and longer-lasting impact on prices. But there is enough supply and concerns about weak demand to protect the market from these events.

“In this new world where US shale is the dominant oil producer globally, it appears that the ‘fear premium’ no longer exists to the same extent,” said Rhett Bennett, CEO of Black Mountain Energy, which has operations in the basin Permian. and Western Australia.

“This diversity of domestic supply, combined with healthy spare capacity within OPEC, translates into the market feeling insulated from a dramatic supply shock – regardless of the perpetual crises in the Middle East,” Bennett added.

Global crude supplies have yet to be disrupted by the Middle East war and attacks by Iran-aligned Houthi rebels on shipping in the Red Sea.

As a result of years of production cuts, OPEC+ has considerable spare capacity, and that has limited the price upside from Middle East tensions, analysts said, as other producers could theoretically make up for supply disruptions.

The International Energy Agency estimates spare OPEC+ production capacity at 5.7 million bpd, nearly 6% of oil consumption, with Saudi Arabia accounting for 54% of the buffer. This is more than Iran’s output of 3.4 million bpd.

US MANUFACTURERS REMAIN IN STOCK

Brent fell 17 percent in the third quarter and 9 percent in September, the biggest monthly decline since November 2022, in part due to downward revisions to OPEC’s global demand growth outlook. West Texas Intermediate fell 16 percent for the quarter and 7 percent for the month to $68.17 a barrel.

“The U.S. has so much production, it’s a strategic cushion,” said Dan Pickering, chief investment officer at Pickering Energy Partners. “I think the supply and demand equation is unchanged, even if the risks to the supply and demand equation are changing.”

While oil could gain immediate support from rising tensions in the Middle East, it is unlikely to spur U.S. operators to ramp up output quickly, Pickering and other shale oil executives said.

Many are cautious as OPEC+ plans to add another 180,000 bpd to the global market in December, and some analysts said a lack of compliance from overproducing members could prompt Saudi Arabia and others to raise output even faster from December.

“It’s too early to weigh these events against what actions OPEC may or may not take to affect supply,” said Michael Oestmann, CEO of Tall City Exploration, a Midland, Texas-based producer.

“This is unlikely to boost drilling or cause any changes to business plans,” he added.

OPEC+ is currently cutting production by a total of 5.86 million bpd, or about 5.7% of global demand.

Analysts at consultancy Wood Mackenzie forecast higher Brent prices for October at $81 a barrel. They noted that this could be revised up or down depending on whether escalation in the Middle East is avoided.

Brent was trading at around $73.95 a barrel at 12:34 pm EDT (1634 GMT) on Wednesday, while WTI crude futures were trading at $70.23 a barrel.

“We see it as a temporary increase, but if the war goes on longer and more countries are involved, then prices could stay high,” said Mark Marmo, CEO of Zelienople, Pennsylvania-based oil firm Deep Well Services.