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Middle East tensions continue to underpin oil prices

(Montel) Oil prices were marginally higher early on Wednesday, with ongoing geopolitical tensions in the Middle East underpinning the market.

The front-month contract for Brent crude North Sea oil was last seen up USD 0.46 at USD 80.01/bbl, while the WTI equivalent was USD 0.44 higher on the day at USD 74.81/bbl.

“Tensions remain high in the Middle East as the US and UK launched more airstrikes on Houthi missile sites to prevent the Iran-backed group from attacking commercial vessels in the Red Sea,” analysts at ANZ bank said.

The US Pentagon said Monday’s strikes hit eight Houthi targets, including an underground storage site and missile and surveillance capability. The strikes are in response to Houthi attacks on commercial tankers in the Red Sea, one of the world’s busiest shipping lanes.

The Houthis have launched attacks on merchant vessels since November, claiming they are only targeting tankers linked to Israel due to its military operation in Gaza.

The rising tensions in the Middle East, which accounts for around one-third of global seaborne oil trade, have buoyed crude oil prices in the front end of the curve. The Brent crude oil benchmark has traded within a USD 72-88/bbl range since November.

The heightened risk to oil supply has seen the Brent crude front month trade around USD 0.50 above the following month's contract, noted ANZ bank.

How long for high prices?
Espen Erlingsen, head of upstream research with Rystad Energy, reckoned that oil prices could stay elevated around current levels for the foreseeable future.

He doubted that the US shale sector would see output grow as it did in previous years, which could give oil cartel Opec an edge in regulating the market. Opec members together account for over 30% of global oil supply, although some members such as Saudi Arabia are voluntarily curbing production.

“Investments in the [US] shale patch are not expected to grow in 2024, keeping activity and output relatively flat, and enabling Opec to effectively regulate the market. As a result, extended periods of high oil prices could be in store,” Erlingsen said in a research note.

Last week, the International Energy Agency estimated global oil supply to rise by 1.5m bbl/day to a new high of 103.5m bbl/day in 2024, led by robust production in the US, Brazil, Guyana and Canada.

The US is the world’s biggest producer of crude oil. The US Energy Information Administration recently forecast the nation’s crude oil output to grow from an annual record average of 13.21m bbl/day this year to 13.44m bbl/day next year.

“Production growth continues over the next two years driven by increases in well efficiency. However, growth slows because of fewer active drilling rigs,” the EIA said earlier this month.

In the immediate term, meanwhile, ANZ bank analysts said that the “upside to outright prices was limited” as recent disruptions to production in Libya and in the US state of North Dakota have or were close to ending.

“Libya has fully resumed exports following the restart of the Sharara oil field. US oil producers are also [slowly] starting to recover from the recent cold snap that curtailed operations in shale oil region of North Dakota,” ANZ bank added.