Crude oil’s muted reaction to Middle East airstrikes based on plentiful supply

An early spike in crude oil prices from rising Middle East tensions proved short-lived Friday, and futures ended lower for the week.

News of U.S.-led airstrikes against Houthi rebels in Yemen initially sent crude futures up as much as 4%, but the market did not panic and prices remained below levels seen a year ago.

Traders anticipate enough new production this year from producers including the U.S. to meet expected demand growth, even with OPEC+ continuing its own cuts and pledging to take ~2M bbl/day more off the market through voluntary cuts.

While the lack of shipping through the Red Sea has created transportation difficulties for some crude supplies, the impact on the physical oil markets so far is minimal.

But “if the conflict were to spread to the other side of the Arabian peninsula [the Persian Gulf]… oil markets may react much more significantly,” Cavanal Hill Investment Management president Matt Stephani said.

Front-month Nymex crude (CL1:COM) for February delivery settled just 0.9% higher Friday, -1.5% for the week, to $72.68/bbl, while March Brent crude (CO1:COM) ended up 1.1% for the day and -0.6% for the week to $78.29/bbl.

Offsetting the latest risk premium were Saudi Arabia’s decision early in the week to cut its selling prices, and a report from the EIA showing large builds in U.S. gasoline and distillate stockpiles.

ETFs: (NYSEARCA:USO), (BNO), (UCO), (SCO), (USL), (DBO), (DRIP), (GUSH), (NRGU), (USOI)

Meanwhile, Citi cited oversupply concerns in lowering its Brent price forecasts for 2024 and 2025, while expecting prices will hold above $70/bbl in 2024 as OPEC+ keeps global oil markets “finely balanced.”

The bank trimmed its 2024 Brent forecast by $1 to $74/bbl and cut its 2025 forecast by $10 to $60/bbl, but said further tension in the Middle East could add near-term upside to the risk premium.

The S&P 500 energy sector (NYSEARCA:XLE) fell 2.3% this week.

Top 5 gainers in energy and natural resources during the past 5 days: Uranium Royalty (UROY) +25.4%, Uranium Energy (UEC) +21.2%, Cameco (CCJ) +18.1%, NexGen Energy (NXE) +16.5%, Brooge Energy (BROG) +15.3%.

Top 5 decliners in energy and natural resources during the past 5 days: Plug Power (PLUG) -19%, Genie Energy (GNE) -18.8%, Arcadium Lithium (ALTM) -18.1%, Aemetis (AMTX) -15.9%, Atlas Lithium (ATLX) -14.4%.

Source: Barchart.com