Brent Falls Almost 5% to Two-Month Low as Analysts Point to a Weakening Physical Market

Brent futures were down $4.57, or 4.65%, at $93.75 a barrel at 1704 GMT, after touching $92.80 during the session. US West Texas Intermediate fell $3.19, or 3.51%, to $87.64. Most of the selling came during European and US hours. In early Gulf trading, Brent had been almost unchanged at $98.08.

Monday's drop followed a fall of 16% last week, the benchmark's steepest weekly decline since the start of the Covid-19 pandemic. AGBI put last week's fall at 17%. A fall of this size matters for Gulf budgets: The National noted on Monday that lower oil revenue during the war has added to financial pressure on Saudi Arabia.

The immediate trigger was US President Donald Trump. He told CNN on Sunday that further military action against Iran would be highly unlikely if negotiations produced a strong agreement, while warning that Washington had identified more infrastructure targets should fighting resume. Last week he had hinted that attacks could resume, but there has been no sign of a large-scale US operation.

"This seems to have encouraged sellers on the prospects for peace even while the actual fighting is not slowing down," analysts at TACenergy wrote in a note. Saxo Bank's Ole Hansen said oil was trading lower "on hopes of a US-Iran peace deal rather than concrete signs of progress."

Signs of Oversupply

Several analysts said falling prices also reflect the market's fundamentals as well as diplomacy. Morgan Stanley said in a report on Monday that Dated Brent, the price used for physical cargoes around the world, has slipped to a discount to the nearby Brent futures contract. That points to weak demand for prompt barrels. "Weakness in the physical market, supported by still-elevated flows out of the Middle East, is one factor weighing on prices," said UBS analyst Giovanni Staunovo.

JPMorgan estimated last week that global supply exceeded demand by 1.1 million barrels a day in September and by 1.4 million barrels a day in October. It said recovering Middle Eastern flows, higher output elsewhere and weak demand caused by high prices were behind the surplus. A Reuters survey found that output from the 11 OPEC members subject to the survey rose by 1.38 million barrels a day in October to 22.87 million barrels a day, with Saudi Arabia, Kuwait and Iraq adding the most despite continued export constraints.

More Iraqi crude may follow. Iraq's foreign minister, Fuad Hussein, told Al Jazeera on Sunday that Baghdad had reached understandings with Washington to export oil through the Strait of Hormuz via a shipping lane near Oman. "Crude futures are under selling pressure once again as oil volumes continue strong through the Strait of Hormuz," said Dennis Kissler, senior vice president of trading at BOK Financial.

Attacks Have Not Stopped

The sell-off came despite continuing attacks on Gulf energy infrastructure and shipping. Saudi Arabia's energy ministry said debris from an attempted attack on Sunday damaged a Saudi Aramco office building in Riyadh's financial district. Yemen's Houthis claimed responsibility. On Monday, state media cited a ministry source as saying a fire on the kingdom's East-West pipeline had been put out, with no casualties and no effect on operations. Iran's Revolutionary Guards navy said three tankers caught fire after striking mines on an unauthorised route through the strait. The US military said it had disabled a commercial vessel in the Gulf of Oman that tried to breach its blockade of Iranian ports.

"Fresh tanker incidents and an attack on Saudi Aramco's offices show that shipping and regional security risks remain unresolved as traders price in a less disruptive outcome," Gelber & Associates said.

US crude reserves are also thin. The Strategic Petroleum Reserve fell to 279.5 million barrels last week, its lowest since October 1982, according to Department of Energy data.

The diplomatic picture remains unclear. Trump was due to meet Qatar's prime minister and foreign minister, Sheikh Mohammed bin Abdulrahman Al-Thani, at the White House on Monday, with Doha mediating between Washington and Tehran. US Secretary of State Marco Rubio said on Sunday that negotiations had made little progress. A senior Iranian security official told state media that Tehran would not negotiate unless Washington took practical steps to meet seven conditions set out in a June interim agreement.