Oil’s rally towards a six-month high paused on Monday as Prince Khalid bin Salman, Saudi Arabia’s defence minister, met Iranian leaders in Tehran while traders weighed the prospect of diplomacy against further attacks on energy infrastructure.
US crude futures fell $1.60, or 1.55%, to $101.67 per barrel by 0018 GMT. Brent crude futures dropped $1.56, or 1.34%, to $115.16. The moves followed a surge to near six-month highs late last week.
Prices had settled nearly $3 higher on Friday after Houthi attacks in Saudi Arabia stirred concern over energy supplies. Brent finished the week up 6%, having closed Friday near $116.72 per barrel.
The Houthis said they attacked the Saudi airport and oil facilities on Saturday. Saudi Arabia said it intercepted further missiles and drones on Sunday, then restarted partial operations at its main airport after damage in an earlier round of Houthi attacks.
On Monday, the Houthis said they had fired missiles at Saudi Arabia’s international airport in Riyadh and sent drones towards oil pumping stations. Saudi authorities have not confirmed that those strikes occurred.
The Tehran meeting brought together Prince Khalid, Iranian President Masoud Pezeshkian and Mohsen Rezaei, secretary of Iran’s Supreme National Security Council. Asim Munir, Pakistan’s army chief of staff, and Ibrahim Kalin, head of Turkish intelligence, also took part. The talks were presented as an effort to ease regional tensions as Qatari mediators, working with the US, travelled to Tehran on Sunday for the same purpose.
The diplomatic activity offered the market a possible route away from military confrontation. Traders had been pricing the opposite risk: further Houthi attacks and possible Iranian attacks that could disrupt supply.
The supply backdrop remains tight. Global inventories have fallen sharply during eight months of conflict, while the US Strategic Petroleum Reserve is at its lowest level since 1982. Saudi Arabia also shut its East-West Pipeline after drone attacks from Iraq in September. The pipeline can carry up to 7 million barrels per day and provides an export route that bypasses the Strait of Hormuz.
Michael Alfaro, chief investment officer at Gallo Partners, said geopolitical uncertainty had already added roughly $20 a barrel to oil prices. He said a major attack on the East-West Pipeline or further refining infrastructure could send prices sharply higher, while “prices above $120 would destroy demand”.
That leaves oil traders with little room for error. A sustained supply disruption would push prices higher, while a move above $120 could weaken the demand that supports them.
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