OIL FUTURES: Crude breaches $80/b as supply side risks increase amid Middle East tensions

Crude oil futures marked gains in mid-afternoon Asia trade Jan. 23, breaching the $80/b mark, as concerns over the escalating risk situation in the Middle East and tight crude production restrained by Saudi Arabia heightened market sentiment.

At 3:06 pm Singapore time (0706 GMT), the ICE March Brent futures contract was up 14 cents/b (0.17%) from the previous close at $80.20/b, while the NYMEX March light sweet crude contract rose 17 cents/b (0.23%) at $74.93/b. The ICE March Brent contract closed at $80.06/b Jan. 22, while the NYMEX March contract closed at $74.76/b.

"While markets focused on Middle East tensions, geopolitical risks escalated on another front after Ukrainian drone attacks against oil facilities on Russia's Baltic coast, raising the stakes in the two-year long war," Saxo analysts said in a Jan. 23 note. "Tensions in the Red Sea also continued to escalate with US and UK making fresh strikes, but overall risk sentiment was positive with markets starting to price in a better economic outlook in the wake of recent strong data."

The latest US- and UK-led strikes on Houthi-controlled areas in Yemen have led to concerns that the ongoing conflict in the Middle East may escalate, putting the region's commercial shipping network under greater risk and likely further pushing up freight rates, S&P Global earlier reported.

The US and UK conducted strikes on eight Houthi targets in Iran-backed Houthi-controlled areas of Yemen, the US Central Command said late Jan. 22.

The attacks are likely to result in more ships avoiding the Red Sea route, which would lengthen the duration of voyages, tighten the supply of ships and lift the additional war risk premia, or AWRP, and freight rates, market participants said.

Key transportation fuel gasoline jumped to a multi-month high on Indonesian demand and Red Sea tensions. The Platts-assessed front month FOB Singapore 92 RON gasoline swap crack against Brent swaps rose 81 cents/b day on day to a near five-month high of $13.44/b on Jan. 22, S&P Global Commodity Insights data showed. The spread was last wider on Aug. 31, 2023 at $14.16/b.

In addition to the supply concerns caused by the regional conflict, Saudi Arabia has cut its crude production to lows not seen since the depths of the coronavirus pandemic to defend oil prices, a gambit that has chipped away at its market share in the key battlegrounds of Asia as volumes rise from OPEC+ counterparts Russia and Iran, among others.

However, with analysts estimating Riyadh's price floor at around $75/b amid an uncertain market outlook, the kingdom may have to maintain its low output levels for a while, if not cut further, though Dated Brent was assessed Jan. 22 at $82.17/b.

Saudi Arabia, which co-chairs the OPEC+ alliance with Russia, has committed since July to holding its output at 9 million b/d. But in recent months it has under-pumped its target, self-reporting production of 8.82 million b/d in November and 8.94 million b/d in December, according to figures published by the OPEC secretariat.

Saudi Arabia's production restraint has come while Iran, which has been exempted from an OPEC+ quota while under US sanctions, has seen its output grow significantly. Tehran pumped 3.10 million b/d in December, according to the latest Platts OPEC+ production survey by S&P Global, a year-on-year increase of more than 500,000 b/d.

Meanwhile, Russia, also under western sanctions, has not committed to any OPEC+ production cuts but rather modest export cuts of 300,000 b/d for the first quarter of 2024.

As Riyadh implemented deep production curbs, it has ceded its top exporter status in China to Moscow, which has sold its crude at discounts. Official data from Beijing show Russia sold an average of 2.15 million b/d to China in 2023, increasing its market share in China to 19%, compared with Saudi Arabia's 15%.

Also potentially denting Saudi market share is a quota increase for the UAE that went into effect Jan. 1, with Abu Dhabi's output set to rise by 30,000 b/d.

Crude prices may have also received a boost from expectations of a three-month low in US crude inventories for the week ended Jan. 19, analysts surveyed by S&P Global Commodity Insights said Jan. 22, due to refinery impacts from extreme weather paired with higher-than-expected crude exports.

US commercial crude stocks likely dipped 3 million barrels to 427 million barrels, analysts said, which would mark the lowest level seen since Oct. 27 when crude stocks were at 421.9 million barrels, according to US Energy Information Administration data.

Crude exports were reported at 5.03 million b/d during the same period, coming in higher than expected, S&P Global Commodity Insights analysts said Jan. 18. Production is expected to decline by 900,00 b/d to 12.4 million b/d due to extreme cold weather and operational challenges shutting in output, particularly in North Dakota and Texas.