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A sharp escalation in geopolitical risk in the Middle East has markets on edge.
That’s what the International Energy Agency (IEA) noted in its latest oil market report, highlighting that the region accounts for more than one-third of the world’s seaborne oil trade.
“The surprise attack by Hamas on Israel on October 7 spurred traders to price in a $3-4 per barrel risk premium when markets opened,” the IEA said in the report, adding that prices have since stabilized.
“While there has been no direct impact on physical supply, markets will remain on tenterhooks as the crisis unfolds,” the IEA went on to state.
In the report, the IEA stated that the Middle East conflict is fraught with uncertainty and added that events are fast developing.
“Against a backdrop of tightly balanced oil markets anticipated by the IEA for some time, the international community will remain laser focused on risks to the region’s oil flows,” the IEA said in the report.
“The IEA will continue to monitor the oil market closely and, as ever, stands ready to act if necessary to ensure markets remain adequately supplied,” the IEA added.
In its report, the IEA said evidence of demand destruction is appearing, “with preliminary September data showing that U.S. gasoline consumption fell to two-decade lows”. The organization added, however, that “buoyant” demand growth in China, India, and Brazil, “nevertheless underpins an increase of 2.3 million barrels per day to 101.9 million barrels per day in 2023”.
World oil production rose 270,000 barrels per day in September to 101.6 million barrels per day, led by higher production from Nigeria and Kazakhstan, the IEA noted in the report. Global output will increase by 1.5 million barrels per day this year, according to the report, “driven by non-OPEC+ growth”.
“Global observed oil inventories tumbled by 63.9 million barrels in August, led by a massive 102.3 million barrel draw in crude oil stocks,” the IEA said in the report.
“Preliminary data suggest that on land inventories continued to draw in September, while oil on water rebounded as exports recovered,” the IEA added.
In its latest short term energy outlook (STEO), the U.S. Energy Information Administration (EIA) noted that the recent attacks on Israel had not affected physical oil markets but warned that they raise the potential for oil supply disruptions and higher oil prices.
The EIA’s October STEO sees total world consumption coming in at 100.92 million barrels per day and total world production coming in at 101.26 million barrels per day in 2023. World demand was 99.16 million barrels per day and output was 99.95 million barrels per day in 2022, according to that report, which projected that total crude oil and other liquids inventory net withdrawals would total 0.06 million barrels per day in the fourth quarter of this year and -0.33 million barrels per day overall in 2023.
The EIA pointed out in its latest STEO that the situation in Israel began developing after it ran its models.
In an analysis posted on the Energy Workforce and Technology Council (EWTC) website last week, the organization’s president, Tim Tarpley, outlined that the attack on Israel “came as a surprise to many Western intelligence agencies” and warned that “the implications to the world energy markets and world trade are unclear at this point but could be quite significant”.
“Should the conflict remain localized with only Israel and Gaza involved, markets may remain relatively stable. However, if the conflict pulls in other regional players or the United States, the effects could be quite wide-ranging,” Tarpley added.
“Should the conflict grow, Iran has long threatened to shut down shipping activity in the Strait of Hormuz … Such an action on the part of Iran could cause significant disruption to world energy markets and international supply chains, and will certainly cause a supply crunch,” he continued.
“Even with a more limited regional response, we can expect a continued focus on energy security in many capitols around the world, especially considering the Russian invasion of Ukraine and other regional conflicts that are going on at the same time,” Tarpley went on to state.
In a report sent to Rigzone last week, analysts at Standard Chartered revealed that they thought there was no significant geopolitical premium in oil prices.
“The price response to the escalation in the Middle East violence has so far been modest and caused, in our view, by short covering by some of the more extreme market bears who now think that the potential for an extreme price downside is more limited,” the analysts stated in that report.
“However, we believe prices are likely to respond to further escalation more significantly,” they added.
The analysts also noted in that report that the main market concern is likely to be Iranian output.
In another report sent to Rigzone last week, Macquarie strategists said they remained bearish despite Middle East events.
“We remain bearish on price but acknowledge upside risk associated with the current conflict in the Middle East,” the strategists said in the report.
“In our assessment, the Biden administration’s policy approach has been to limit oil supply disruptions, regardless of the situation,” they added.
“Given that policy objectives did not target Russian oil flows even at the height of the Russia-Ukraine conflict, we do not expect Iranian oil exports to be constrained either,” they continued.
To contact the author, email andreas.exarheas@rigzone.com
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