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Supply Keeps Lid on Oil Prices as Middle East Troubles Simmer

The energy market is not reflecting risk of a conflict that would disrupt oil shipments, for now, despite heightened tensions in the Middle East.

Henrik Weis | Lifesize | Getty Images

Iran’s nuclear aspirations are by far the biggest threat to security, but a the fatal attack against the American Ambassador in Libya and three other diplomats, and protests there and around the American embassy in Cairo Tuesday once more put the focus back on the sweeping changes in the Middle East that came with the Arab Spring.

U.S. officials are investigating whether the attack in Libya that killed Ambassador J. Christopher Stevens may have been pre-planned. The embassy protests, however, appear to have been more spontaneous reactions to an anti-Muslim video produced in the U.S.

President Obama offered praise for the Libyan government, whose security forces fought back against the mob around the U.S. embassy and helped protect American diplomats. The U.S. is sending an elite group of Marines to Libya to guard U.S. diplomatic facilities in Tripoli.

But in Egypt, where protesters scaled the walls and shredded and burned the American flag, Egyptian President Mohammed Morsi has not issued a statement on the embassy attack or on the deaths of the American diplomats. Protests continued Wednesday, and the Muslim Brotherhood ruling party called for nationwide protests Friday against the controversial video. (Read More: Romney Bashes Obama Anew Over Foreign Attacks)

“I think it’s more a question of where Egypt is going, and how will the Arab spring take place” said Robert Danin, Eni Enrico Mattei senior fellow for the Middle East and Africa studies at the Council on Foreign Relations. “Today, we had demonstrations in Morocco, Algeria, Tunisia. Is this a harbinger of something bigger?”

“The Arab Spring does not look like it’s coming to a peaceful or democratic denouement,” he said.

The price of oil, often a mirror for geopolitical fears, was barely changed Wednesday after greater than expected inventories were reported by the U.S. Department of Energy. West Texas crude finished the day at $97.01 per barrel, down 16 cents, while Brent crude, more a reflection of the international oil price, gained 56 cents to $115.96 per barrel.

“I think a lot of the geopolitical risk has been priced into the market and until we see signs that supply problems are occurring, the market is going to have trouble pushing up on this,” said Gene McGillian, analyst with Tradition Energy. The Energy Information Administration reported domestic stocks increased two million barrels to 359.1 million barrels for the week ending Sept. 7, while the market had expected a decline.

Besides more ample supplies in the U.S., OPEC reported Tuesday that it increased production to a record 31.4 million barrels a day in August. The U.S., based on 2011 data, was importing just 45 percent of its oil, the lowest level in eight years.

“You have the Saudis pumping. You have the record Russian production. Our domestic production is increasing. There are ample stock piles,” said McGillian. He said slowing growth in China and Europe are issues for demand.

John Kilduff of Again Capital said the prospect of a new round of Fed easing was keeping a floor under oil prices and the German court ruling, upholding Europe’s bailout program also helped Wednesday. “I think the top may be in here for now,” said Kilduff. “The only thing that can change it is the Iran risk.”

Kilduff said WTI futures contracts for the months of December through February price oil in the $97 per barrel range. “It’s one of the flattest term structures we’ve seen in a while,” he said. May 2013 futures were at the high end of the range, at $98.50. He said for now, the market is not expecting any military action around Iran, either an Israeli attack or any Iranian action to close the Strait of Hormuz.

“Hillary Clinton made it clear they are going to let this play out a little longer,” he said. Secretary of State Clinton commented over the weekend that the U.S. was not setting a deadline for Tehran, something that Israeli Prime Minister Benjamin Netanyahu has sought from the U.S. That comment sparked a reaction from Netanyahu, who said the Obama Administration has no “moral” right to keep Israel from attacking Iran as long as the U.S. won’t set a “red line.”

The White House said the two leaders spoke by phone for an hour Tuesday night, reaffirming “they are united in their determination to prevent Iran from obtaining a nuclear weapon.”

So far, negotiations with Iran have failed to stop it from pursuing its nuclear program, but financial sanctions against Iran and its ability to sell its oil on world markets appears to be pinching it more than past efforts.

There’s no sign that the sanctions are mobilizing discontent against the regime, Danin notes.

“If anything they may be accelerating the regime’s determination to go for nuclear potential. It’s not necessarily an argument against doing it, but I think what the Israelis ultimately believe is they think the West’s, the U.S. and Europeans, negotiations become an end in themselves, rather than becoming a means to an end which means stopping the nuclear developments,” he said.

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.