Oil set for weekly drop as market ‘buffer’ vanishes, Rystad warns

Oil prices were set for their steepest weekly drop in six months after falling on Friday.

This decline followed an announcement by US President Donald Trump that he would halt attacks on Iran's energy plants for 10 days, stating that talks to end the conflict were progressing well.

The price of West Texas Intermediate crude oil was last at $93.89 per barrel, down 0.7%, while Brent was at $101.54 per barrel, down 0.4% from the previous close.

Despite Brent crude rising 5.7% and WTI gaining 4.6% on Thursday due to fears of further war escalation, both benchmarks still closed the week 4.6% lower.

Priyanka Sachdeva, analyst at Phillip Nova said:

Despite talks of de-escalation, oil is trading ​on war longevity, not just headlines. Any direct damage to oil infrastructure or prolonged conflict could force markets to rapidly reprice higher

Despite Trump announcing a temporary halt to attacks on Iran's energy infrastructure, the US has deployed thousands of troops to the Middle East.

Furthermore, Trump is reportedly considering the option of using ground forces to capture Iran's key strategic oil hub, Kharg Island.

A senior Iranian official dismissed a 15-point US proposal, delivered via Pakistan, as "one-sided and unfair," according to a Reuters report. 

Geopolitical instability drives long-term price forecasts

The conflict has severely impacted global oil supply, removing 11 million barrels per day from the market.

The International Energy Agency (IEA) has described this crisis as more severe than the combined impact of the two 1970s oil shocks and the Russia-Ukraine war's effect on gas supply.

Macquarie Group analysts suggest that a swift end to the conflict would cause oil prices to drop quickly in the near term, though they would likely stabilize at pre-conflict levels. 

Conversely, the analysts project that prices could soar to $200 per barrel if the war persists until the end of June.

Despite the loss of a significant 17.8 million barrels-per-day (bpd) in trade flow from the Strait of Hormuz—including 14.2 million bpd of crude oil and condensates—the crude oil market has shown remarkable resilience, maintaining stability for almost four weeks, according to an analysis from Rystad Energy. 

Global oil system's "buffer" disappears, risks soar

Rystad Energy’s Chief oil analyst Paola Rodriguez-Masiu said in an emailed commentary:

The relatively muted price reaction was possible because the market entered this crisis with a heavily buffered system

"But that buffer has disappeared."

The global oil system's capacity to absorb shocks has been depleted in the last three weeks.

Consequently, any secondary disruption that previously would have resulted in a predictable and manageable price increase within a buffered market would now severely impact a system with no remaining absorptive capacity, Rystad said. 

Examples of such disruptions include an outage at the CPC pipeline (Caspian through Russia), a severe hurricane season, or damage to infrastructure in Yanbu or Fujairah.

Prior to the conflict, the global outlook anticipated a substantial crude oil surplus, estimated at about 3.0 million barrels per day (bpd) this year. 

Inventories, both onshore and offshore, were high, and there was a healthy, though geographically concentrated, amount of spare production capacity available.

“Those combined “extra” barrels allowed the market to absorb a supply shock that, in any other starting configuration, would have caused prices to react more violently,” the Norway-based energy intelligence agency said.