Oil prices fell to their lowest level in 11 days on Monday, as investors looked for signs that the US-Iran conflict could move toward diplomacy and watched for a recovery in Saudi Arabia’s oil shipments.
Oil market outlook
Brent crude futures fell $2.12, or 2%, to $101.75 a barrel at 0859 GMT. The contract had earlier touched its lowest level since September 10, according to Reuters. US West Texas Intermediate (WTI) crude also dropped about 2%. The October WTI contract, which expires on Tuesday, fell $1.96 to $98.34 a barrel. The November WTI contract was at $94.16. The analysts made the assessment in a September 18 note. Satellite data showed that Saudi oil moving through the Strait averaged 2.9 million barrels per day over the past six days. That is a sharp increase from August, when Saudi oil flows through the Strait averaged only about 700,000 barrels per day.
Iran’s security chief Mohsen Rezaei told mediators what Tehran would require before re-engaging in talks, Al Jazeera reported, citing an interview from Saturday. A Revolutionary Guards spokesman said Iran would use new weapons and target locations that it had not attacked before, Fars news agency reported. One major reason behind the fall is growing hope for US-Iran diplomacy. Investors are watching this week’s United Nations General Assembly in New York for any signs that the two sides could move toward talks. Iran has also given conditions for returning to negotiations. Yanbu is an important location for Saudi oil exports, making any disruption there important for global crude markets. Iran has warned that it could escalate further if the US launches another offensive. China has also become involved in efforts to contain the regional tensions. The attacks on Saudi Arabia’s East-West pipeline have changed how the country is moving its oil. The attacks prompted Saudi state energy company Saudi Aramco to increase exports through the Strait of Hormuz this month and next after stopping some shipments through Yanbu. This has reduced some fears that the conflict would cause a major shortage of crude supplies. Saudi Arabia’s increased shipments through the Strait of Hormuz are a key reason behind the stronger oil flows. The data indicates that Saudi Arabia is redirecting more crude through the important shipping route. JPMorgan analysts described Saudi Arabia’s change in oil flows as the “most notable pivot. The higher shipments suggest that the market is still receiving significant volumes of Saudi crude even after attacks disrupted some export routes. For oil markets, the combination of possible US-Iran diplomacy and stronger Saudi shipments is easing supply fears. The key question now is whether the diplomatic signals continue and whether Saudi oil exports remain strong. A breakthrough in US-Iran talks could put further pressure on oil prices, while renewed attacks or a wider conflict could bring supply concerns back into focus.
Because of attacks linked to the wider conflict, but the situation in the Middle East remains tense. Because saudi oil is still reaching global markets despite the disruption, that shift is important. Because of the conflict, investors are therefore removing some of the extra risk they had priced into crude.
“It seems that a degree of risk premium is being removed from oil prices on hopes that a diplomatic path to de-escalate the US-Iran war may arrive this week,” said Tim Waterer, chief market analyst at KCM Trade, according to Reuters. Yemen’s Iran-backed Houthis said they attacked what they called “sensitive” sites in Riyadh, Saudi Arabia, using missiles and drones on Saturday. The Houthis also said they attacked an Aramco facility in Yanbu on Saudi Arabia’s Red Sea coast. Three Iranian sources familiar with the matter said China asked Iran to help rein in the Houthis after Saudi Arabia appealed to Beijing following the attacks. JPMorgan analysts said Middle East oil flows have remained “surprisingly strong” despite the damage to Saudi Arabia’s East-West pipeline.
Pezeshkian is expected to be in New York this week for the UN General Assembly. This means the conflict has not ended and tensions remain high despite hopes for a diplomatic solution. If the possibility of a wider conflict falls, traders have less reason to keep that extra risk premium in oil prices.
Because of fears that the US-Iran conflict could disrupt Middle East oil supplies, oil prices had gained a risk premium.
US President Donald Trump said he would be open to meeting Iranian President Masoud Pezeshkian, according to Reuters. The two countries were still exchanging threats on Sunday, however.
