Oil Market's Response to Middle East Conflict

By Georgina McCartney and Liz Hampton

HOUSTON/DENVER (Reuters) – The oil industry and markets have responded modestly to increasing conflict in the Middle East, indicating sufficient oil supplies as U.S. production rises and OPEC+ plans to boost output.

The global oil benchmark Brent rose 5% on Tuesday following Iran's attack on Israel in retaliation for its actions against Hezbollah in Lebanon. However, the price eventually settled at $73.56, only 2.6% higher, in line with last week’s levels. Oil futures increased by just 34 cents on Wednesday after the U.S. reported a significant build in oil stocks.

The U.S. is currently producing approximately 13.4 million barrels per day (bpd) and is projected to reach a record 13.49 million bpd by year-end, according to U.S. government data. Simultaneously, OPEC and its allies, collectively known as OPEC+, which have focused on production cuts since 2022, are preparing to increase output.

Historically, conflicts in oil-producing regions would significantly impact prices, but adequate supply and concerns over soft demand are cushioning the market against such events.

Rhett Bennett, CEO at Black Mountain Energy, noted that with U.S. shale becoming the dominant global oil producer, the 'fear premium' associated with such conflicts has lessened. The mix of domestic supply and OPEC's spare capacity offers resilience against dramatic supply shocks amid ongoing regional tensions.

Recent global crude supplies remain intact despite conflicts, including Iranian-aligned Houthi rebels attacking vessels in the Red Sea. OPEC+ has substantial spare production capacity estimated at 5.7 million bpd (nearly 6% of global consumption), with Saudi Arabia being the majority contributor.

U.S. producers maintain steady output amid falling Brent prices, which dropped 17% in the third quarter and 9% in September. Despite potential immediate support from the Middle East conflict, experts believe U.S. operators are unlikely to rapidly increase production, especially as OPEC+ plans an additional 180,000 bpd to the market in December.

Michael Oestmann, CEO of Tall City Exploration, suggested that analyzing these events in relation to OPEC's decisions is premature. OPEC+ is currently reducing output by 5.86 million bpd.

Analysts from Wood Mackenzie project higher Brent prices for October at $81 per barrel, although this may vary based on developments in the Middle East. Brent futures saw a slight rise of 34 cents, or 0.46%, closing at $73.90 per barrel, while U.S. West Texas Intermediate crude settled up 27 cents, or 0.39%, at $70.10 per barrel.

Mark Marmo, CEO of Deep Well Services, mentioned that while current price increases might be temporary, prolonged conflicts could lead to sustained higher prices.