Plentiful Oil Supply Reduces Industry Response to Growing Geopolitical Tensions

By Georgina McCartney and Liz Hampton

HOUSTON/DENVER – The oil industry and markets have shown only a modest response to escalating tensions in the Middle East, indicating a well-stocked supply of oil as U.S. production increases and OPEC+ gets ready to boost output.

On Tuesday, the global oil benchmark experienced a 5% jump after Iran, a significant producer and member of the Organization of the Petroleum Exporting Countries (OPEC), carried out an attack against Israel in response to ongoing hostilities with Hezbollah in Lebanon. Despite this spike, Brent crude oil prices settled only 2.6% higher at $73.56, remaining consistent with last week’s figures. Oil futures saw a slight increase of about 30 cents on Wednesday following a U.S. report indicating a substantial rise in oil inventories.

The U.S. is currently producing approximately 13.4 million barrels of oil per day, with forecasts suggesting an increase to a record 13.49 million barrels per day by the end of the year. Meanwhile, OPEC and its allies, collectively known as OPEC+, which have focused on production cuts since 2022, are poised to begin increasing their output later this year.

Historically, rising tensions in oil-producing regions would have typically led to more significant and sustained impacts on oil prices. However, the current supply levels and concerns regarding weaker demand are softening the market’s reaction to such events.

"In this new environment, where U.S. shale dominates global oil production, the ‘fear premium’ seems to have diminished," noted Rhett Bennett, CEO of Black Mountain Energy, which operates in the Permian Basin and Western Australia. He added that the varied supply sources from domestic production, coupled with substantial spare capacity within OPEC, create a buffer against drastic supply shocks, regardless of ongoing conflicts in the Middle East.

As of now, global crude supplies remain unaffected by the ongoing conflict in the region, including attacks by Iran-aligned Houthi rebels on vessels in the Red Sea.

Due to prior production cuts, OPEC+ holds substantial spare capacity, which limits potential price increases stemming from Middle Eastern tensions, as other oil producers can theoretically substitute for any supply disruptions. The International Energy Agency estimates OPEC+ spare production capacity at 5.7 million barrels per day, accounting for nearly 6% of global oil consumption, with Saudi Arabia holding the vast majority of this buffer, exceeding Iran’s production of 3.4 million barrels per day.

US PRODUCERS HOLD STEADY

Brent crude prices fell 17% during the third quarter and 9% in September, marking the largest monthly drop since November 2022, partly due to downward adjustments in OPEC’s global demand growth projections. Similarly, West Texas Intermediate dropped 16% for the quarter and 7% for September, settling at $68.17 per barrel.

"The U.S. has such an abundance of production that it serves as a strategic cushion," said Dan Pickering, chief investment officer at Pickering Energy Partners. He added that while immediate tensions may provide some support for oil prices, they are unlikely to prompt U.S. producers to significantly increase output anytime soon.

Operators are generally cautious, especially with OPEC+ planning to add an extra 180,000 barrels per day to the global market in December. Some analysts suggest that non-compliance from OPEC+ members currently overproducing could lead Saudi Arabia and others to accelerate output increases.

"It’s premature to compare these events with any moves OPEC may take concerning supply," remarked Michael Oestmann, CEO of Tall City Exploration in Midland, Texas. He further stated, "It’s unlikely that this situation will spur drilling or alter existing business strategies."

OPEC+ is currently enforcing output cuts totaling 5.86 million barrels per day, equating to about 5.7% of global demand.

Analysts from consultancy Wood Mackenzie forecast higher Brent prices for October, projecting $81 per barrel, though this estimate may be adjusted depending on whether the situation in the Middle East escalates further.

As of Wednesday midday, Brent was trading at approximately $73.95 per barrel, while WTI crude futures were around $70.23 per barrel. Mark Marmo, CEO of Deep Well Services, suggested, "We view this as a temporary uptick, but if the conflict prolongs and involves more nations, prices might remain elevated."