Editorial: Keep calm, carry on

Events in the Middle East have taken a turn for the worse but the market response has been remarkably sanguine

Oil markets were this week caught in the crossfire of escalating tensions between the US, its Mideast Gulf allies Saudi Arabia and the UAE, and Iran. An attack on four oil tankers off the UAE's Fujairah oil terminal by as yet-unknown assailants and a drone strike by Iranian-backed Yemeni Houthis on two pumping stations in Saudi Arabia initially rang alarm bells, but the impact on futures prices was relatively muted, given a dearth of verifiable information and limited damage.

Opec and its non-Opec partners are expected to maintain their equanimity at the group's Joint Ministerial Monitoring Committee (JMMC) meeting in Jeddah on 19 May. The escalating war of words between Saudi Arabia and Iran is causing a deep divide among member countries, with nearly all of them alarmed at the prospect of military activity in the region. But Opec has a well-documented history of circumventing geopolitical infighting as it pursues its production policy discussions. The Jeddah gathering is unlikely to be an exception.

Geopolitical issues aside, Opec and its allies are gathering against a backdrop of stronger fundamentals, and are reaping the rewards of their efforts to rein in supply. Robust demand from Asia-Pacific refiners has pushed spot values for Mideast Gulf grades to multi-year highs. North Sea Dated prices remain firmly backwardated — high prompt premiums to forward values — while the backwardation on the Dubai forward curve is the steepest in nearly six years.

The JMMC's task is to assess how the supply outlook will be altered by US president Donald Trump's decision in late April to force a zero-export policy on Iran. Iran's crude exports fell to 1.14mn b/d in April and could slip further to 500,000-700,000 b/d in the near future. Equally, the implosion of contentious trade talks between the US and China has once again raised demand concerns going into the second half of the year.

Saudi oil minister Khalid al-Falih had said the Jeddah meeting would "be a key decision" point ahead of the Opec ministerial meeting in June, but in the wake of the latest events in the Mideast Gulf, ministers will probably focus instead on the more mundane tasks, and keep to the narrow script of discussing supply and demand forecasts and reviewing compliance.

Opec revised its natural gas liquids and non-conventional liquids assumptions and raised the projected demand for its crude this year by nearly 300,000 b/d to 30.6mn b/d in its latest Monthly Oil Market Report. The IEA foresees second-quarter demand for Opec crude at 700,000 b/d above the group's April production.

Saudi Arabia continues to offset the production deal underachievers through its own strong overcompliance. Hopes that bringing Iraq and Nigeria into the JMMC fold would improve their compliance is clearly not having the desired effect. Iraqi compliance has sunk to 38pc, despite oil minister Thamir Ghadbhan's pledge in March that the country would observe "strict adherence" with its objective. Iraq has scant incentive to curb its sour crude output in a market deprived of rival Iranian and Venezuelan heavy sour grades.

Despite the US ratcheting up its maximum-pressure campaign on Iran, and Saudi Arabia launching a retaliatory strike against the Houthis in Yemen, traders have largely opted to take to the sidelines while political pundits decipher the machinations behind the attacks and wait for calmer heads to prevail.