According to analysts and traders, the impact of the Middle East crisis on benchmark oil futures prices is being mitigated by ample supplies of some of the largest crude grades.

Last week, Brent crude futures temporarily reached their highest level since October at $92 per barrel. Even if governments are already having a difficult time keeping up with rising fuel prices and inflation, things might have been worse if physical supplies were scarcer.

The Middle East is the world’s biggest oil-producing region, yet thus far the conflict has not significantly affected oil supplies from this region.

“In the absence of actual supply/production issues this market will struggle to convincingly challenge the annual peaks reached at the end of last week,” said Tamas Varga of oil broker PVM.

There are indications that the price of some of the most significant crude grades is declining.

According to LSEG statistics, the difference between the premium of Forties crude and the dated Brent benchmark in the North Sea physical market has decreased to 35 cents from a 2024 high of $2.30 in February.

Nigeria, the largest oil exporter in Africa, has had difficulty unloading cargoes meant for May loading, and some vendors have been lowering bids this week. Two dealers told Reuters that at least 35 of the 49 shipments are still available, which is a relatively slow sales pace for this time of the month.

With claims that Israel had attacked Iran, Brent saw a jump on Friday, rising more than $3.50 to a high of $90.75. However, this fell short of the top from last Friday, and it returned to trade flat for the day.

Market concerns over a significant escalation of hostilities in the Middle East seemed to subside.

Based on market fundamentals, Rystad Energy believes Brent has a fair value of approximately $83, “indicating a current premium attributable to geopolitical concerns,” according to analyst Jorge Leon.

“Despite the latest strike, Rystad Energy’s view remains that, barring a significant escalation in the Middle East, the geopolitical risk premium will stabilise and gradually decrease,” he stated.

HSBC analysts stated that “a fair degree of geopolitical risk (is) already priced in” and that the OPEC+ producing group’s large spare production capacity is “helping to keep oil prices in check” in addition to the lack of impact on supply.

Reversing the momentum observed in February, the physical markets are showing signs of weakness due to peak refinery maintenance, excess supply from the US, and recovery from outages at several producers.

According to Kpler data, Libyan oil output has rebounded after disruptions earlier in the year, while U.S. petroleum exports to Europe in the first four months of 2024 are increasing year over year.

West Texas Intermediate (WTI) Midland is quite available, according to a trading analyst. Of the six crude streams that support the Brent benchmark, Midland is the biggest.

The spread between the first-month Brent contract and the six-month contract fell to $3.51 a barrel on Thursday, the lowest level in over a month, which is another sign of the weakness of the market. This market structure, known as backwardation, is loosening, which suggests that supply constraints are lessening.

Analysts noted that although the lighter, sweeter crudes that support Brent futures have lower density and sulphur content and are readily available, the heavier, more sulphurous, or sour, grades that are usually produced in the Middle East are more scarce.

Long-term OPEC+ supply cutbacks have removed a significant amount of sour crude from the market, according to seasoned oil trader Adi Imsirovic. This is especially true because producers in the group prefer to sell their lighter grades, which bring in more money per barrel.

According to Imsirovic, two additional developments have exacerbated the supply imbalance between sweet and sour crude: Mexico’s decision to reduce crude exports this month and next, and the United Arab Emirates’ decision to export more light Murban crude while rerouting heavier Upper Zakum into the new Ruwais refinery.

The excess production capacity of OPEC+ offers considerable flexibility in the event that real supply disruptions occur. OPEC+ spare capacity is estimated by the International Energy Agency to be around to six million barrels per day, or about 6% of global consumption.

“The price reaction to a potential supply deficit/demand excess is much more muted when there is something to fall back on,” PVM’s Varga said.

(Adapted from EnergyExch.com)