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.
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-Iran talks
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.
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.
Trump and Iran
US President Donald Trump said he would be open to meeting Iranian President Masoud Pezeshkian, according to Reuters. Pezeshkian is expected to be in New York this week for the UN General Assembly. The two countries were still exchanging threats on Sunday, however. This means the conflict has not ended and tensions remain high despite hopes for a diplomatic solution.
Oil price risk
{{/usCountry}}US President Donald Trump said he would be open to meeting Iranian President Masoud Pezeshkian, according to Reuters. Pezeshkian is expected to be in New York this week for the UN General Assembly. The two countries were still exchanging threats on Sunday, however. This means the conflict has not ended and tensions remain high despite hopes for a diplomatic solution.
Oil price risk
{{/usCountry}}Oil prices had gained a risk premium because of fears that the US-Iran conflict could disrupt Middle East oil supplies. If the possibility of a wider conflict falls, traders have less reason to keep that extra risk premium in oil prices.
"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.
Also read: US stock market futures rise: Dow, S&P 500, Nasdaq gain as oil falls and Trump-Xi talks loom
Middle East tensions
Iran has also given conditions for returning to negotiations. 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. But the situation in the Middle East remains tense because of attacks linked to the wider conflict. 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. 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. A Revolutionary Guards spokesman said Iran would use new weapons and target locations that it had not attacked before, Fars news agency reported.
Saudi oil shipments
China has also become involved in efforts to contain the regional tensions. 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.
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. That shift is important because Saudi oil is still reaching global markets despite the disruption. This has reduced some fears that the conflict would cause a major shortage of crude supplies.
Saudi oil exports
JPMorgan analysts said Middle East oil flows have remained "surprisingly strong" despite the damage to Saudi Arabia's East-West pipeline. The analysts made the assessment in a September 18 note.
Saudi Arabia's increased shipments through the Strait of Hormuz are a key reason behind the stronger oil flows. Satellite data showed that Saudi oil moving through the Strait averaged 2.9 million barrels per day over the past six days.
Strait of Hormuz
That is a sharp increase from August, when Saudi oil flows through the Strait averaged only about 700,000 barrels per day. 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.
Oil market outlook
For oil markets, the combination of possible US-Iran diplomacy and stronger Saudi shipments is easing supply fears. Investors are therefore removing some of the extra risk they had priced into crude because of the conflict.
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.