Brent crude futures briefly topped $92 a barrel last week, the highest since October. While that's bad news for governments struggling to control inflation and high fuel costs, it could have been worse if physical supplies were tighter.

To date, the conflict has not had a big impact on oil supplies from the Middle East, the world's top producing region.

"In the absence of actual supply/production issues this market will struggle to convincingly challenge the annual peaks reached at the end of last week," said Tamas Varga of oil broker PVM.

Some of the most important crude grades are showing signs of weakening in price.

In the North Sea physical market, Forties crude's premium to the dated Brent benchmark, which hit a 2024 high of $2.30 in February, has eased to 35 cents, LSEG data shows.

Africa's top crude exporter Nigeria has struggled to offload cargoes scheduled for May loading, and some sellers have been reducing offers this week. At least 35 out of 49 cargoes are still available, two traders told Reuters, relatively slow sales for this point in the month.

On Friday, Brent spiked on reports Israel had attacked Iran, gaining over $3.50 to a high of $90.75. But this was short of last Friday's peak, and it fell back to trade flat on the day.

Rystad Energy sees fair value for Brent at about $83 based on market fundamentals, "indicating a current premium attributable to geopolitical concerns," analyst Jorge Leon said.

"Despite the latest strike, Rystad Energy's view remains that, barring a significant escalation in the Middle East, the geopolitical risk premium will stabilize and gradually decrease," he said.

OIL PRICES IN CHECK

Along with the lack of impact on supply, the fact that the OPEC+ producer group has ample spare production capacity is "helping to keep oil prices in check", HSBC analysts said, while noting "a fair degree of geopolitical risk (is) already priced in".

The weakening signs in physical markets have been driven by peak refinery maintenance, extra supply from the United States, and a recovery from outages at some producers, reversing the strength seen in February.

Libyan oil output has recovered from outages earlier this year and U.S. crude exports to Europe in the first four months of 2024 are tracking higher year-on-year, according to Kpler data.

There is good availability of West Texas Intermediate (WTI) Midland, a trading analyst said. Midland is the largest of the six crude streams that underpin the Brent benchmark.

In a further indication of market fragility, the premium of the first-month Brent contract to the six-month contract eased to $3.51 a barrel on Thursday, the lowest in about a month. The easing in this market structure, called backwardation, indicates that supply tightness is fading.

Even so, analysts said that while lighter, sweeter crudes that have lower density and sulphur content and underpin Brent futures are well supplied, heavier, more sulphurous - or sour - grades typically produced in the Middle East are tighter.

Protracted OPEC+ supply cuts have taken considerable supply of sour crude off the market, particularly as producers in the group favour the sale of their lighter grades that yield more revenue per barrel, veteran oil trader Adi Imsirovic said.

The supply imbalance between sweet and sour crude has been compounded by two other developments, Imsirovic said - Mexico's decision to slash crude exports this month and next, and the United Arab Emirates exporting more light Murban crude while it diverts heavier Upper Zakum into the new Ruwais refinery.

OPEC+'s spare production capacity provides some leeway in the event of actual disruption to supplies. The International Energy Agency puts OPEC+ spare capacity at close to six million barrels per day, equal to around 6% of world demand.

"The price reaction to a potential supply deficit/demand excess is much more muted when there is something to fall back on," PVM's Varga said.