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Oil firms as Middle East crisis lingers, US output wanes

(Montel) Oil prices edged higher early on Wednesday amid lingering tensions in the Middle East and following fresh indications of waning US crude production.

The front-month contract for Brent crude North Sea oil was last seen up USD 0.05 at USD 78.64/bbl, while the WTI equivalent was USD 0.14 higher on the day at USD 73.45/bbl.

Notwithstanding the modest gains this morning, the Brent crude benchmark has hovered within a range of USD 74-85/bbl since the start of the year.

“The oil market continues to trade in a range despite lingering geopolitical risks in the Middle East,” analysts at ING bank said, regarding the Israel-Hamas war and US-led retaliatory strikes on key targets operated by Yemen's Iran-backed Houthi rebels – who have been attacking merchant vessels in the Red Sea – and other Iran-backed militant groups in the region.

“Given the heightened geopolitical risk, the rangebound trading and lack of a risk premium may surprise some. However, market participants appear to be assuming that we will not see a significant escalation in the Middle East, at least an escalation which puts oil supply at risk,” ING said in a note.

“It’s important to remember that while we are seeing disruptions to trade flows as a result of Red Sea developments, oil production remains unchanged as a result. Furthermore, the oil balance is comfortable through [the first half of 2024], while Opec is sitting on a little more than 5m [bbl/day] of spare capacity, of which more than 3m [bbl/day] sits in Saudi Arabia.”

Meanwhile, analysts have pointed out that non-Opec supply remains relatively strong, especially following recent record high production in the US, the world’s largest producer of crude oil.

“Unexpectedly strong growth in US oil production was a major reason for oil prices falling sharply in the second half of [last] year,” analysts at ANZ bank said, regarding US output surpassing a record high of 13m bbl/day.

US output on the wane
However, the ANZ analysts, citing data from the US Energy Information Administration (EIA), pointed out that US crude production dropped from 13.3m bbl/day in December to 12.6m bbl/day in January.

“While February volumes should rebound, EIA doesn’t expect them to hit a new record high until 2025,” the analysts added in a note.

In its latest short-term outlook, the EIA forecast US crude production to rise from an average 13.10m bbl/day this year to 13.49m bbl/day in 2025. However, the outlook for this year is a slight downward revision from the EIA’s forecast of 13.21m bbl/day a month ago.

“Last year US crude oil supply grew by a little more than 1m [bbl/day] and the drop in growth this year shouldn’t come as too much of a surprise given the slowdown seen in drilling activity for much of last year,” said the ING bank analysts.

Meanwhile, the EIA is due to publish its latest weekly data for US crude inventories later today, with the figures indicating a gauge on demand. A larger-than-expected build in inventories could suggest flagging demand from the world’s biggest consumer of oil.

The American Petroleum Institute, an industry group, reported on Tuesday that US crude inventories rose by 0.67m barrels last week, according to ING bank, which said the market was expecting a week-on-week build of 2m barrels.

“Any build in US crude oil inventories could see oil prices come under pressure,” said ANZ bank.