Oil prices fall as US-Iran diplomacy hopes offset Saudi attack threats

France to deploy troops, radar to protect Saudi energy infrastructure at Yanbu

Oil prices declined Friday as investors weighed prospects for US-Iran diplomacy against continued threats to Saudi energy infrastructure. Brent crude futures fell 1.1% to $105.45 a barrel, while West Texas Intermediate dropped 1.9% to $92.85 a barrel in early European trading.

The pullback partially reversed Thursday’s sharp gains, when Brent rose 3.4% to $106.60 a barrel and WTI gained 2.7% to $94.61 after Saudi Arabia said its air defenses had intercepted missiles fired at the kingdom. A Houthi spokesperson said the group targeted Riyadh and Saudi Aramco facilities in the port city of Yanbu using missiles and drones. Earlier Thursday, Saudi Arabia’s coalition fighting in Yemen said its air defenses intercepted and destroyed six ballistic missiles launched by the Houthis.

Markets are reassessing the risk of Middle East supply disruptions against the possibility of a US-Iran agreement to reopen the Strait of Hormuz, Linh Tran at XS.com said. There is no concrete agreement yet, keeping uncertainty around regional supplies elevated, Tran said.

Near-term oil-market fundamentals remain tight despite efforts to restore regional supply routes, the National Bank of Kuwait said in an oil-market report Thursday. Brent’s front-month spread remains around $4 to $5 a barrel, significantly above levels of less than $1 in February, reflecting tight prompt supplies, the bank said. Without a near-term agreement to fully reopen the strait, fundamentals are likely to remain tight, NBK said.

The International Energy Agency said global observed oil inventories have fallen by 507 million barrels since the conflict began, equivalent to an average draw of 2.8 million barrels a day. Stocks fell by a further 95 million barrels in August alone, leaving smaller buffers against additional supply disruptions. US commercial crude inventories, however, rose by nearly 3 million barrels in the week ended Sept. 18 to 426.4 million barrels, according to the Energy Information Administration.

France plans to send soldiers, radar and defense systems to Saudi Arabia to help protect a refinery and crude-oil pipeline at the Red Sea port of Yanbu, French President Emmanuel Macron said Thursday. Macron said France had agreed with Saudi authorities on the deployment, adding that France wasn’t entering the conflict.

Yanbu has become a key outlet for Saudi crude as the kingdom uses its East-West pipeline to bypass disruptions around the Strait of Hormuz. The route through the Red Sea has taken on greater importance as attacks and threats to shipping have complicated the movement of Middle Eastern oil.

Alternative Gulf export routes have already helped offset some of the disruption. Combined oil exports through Saudi Arabia’s Yanbu and the United Arab Emirates’ Fujairah — which is located on the eastern coast of the UAE and allows exports to avoid Hormuz — rose to 7.8 million barrels a day in June from 4.1 million before the conflict, before falling to 5.5 million barrels a day in August as attacks disrupted bypass routes, according to the IEA.

The wider energy market also remains exposed to further disruptions. The conflict has reduced crude-oil supplies by an estimated 27%, refined-product supplies by 21% and liquefied-natural-gas supplies by 16%, according to S&P Global Energy CERA. War-risk premiums have not disappeared simply on announcements of potential progress, it said in analysis published Thursday.

Meanwhile, Iranian President Masoud Pezeshkian said at the United Nations this week that Tehran remained ready for dialogue and negotiations but wouldn’t accept restrictions on what it describes as its peaceful nuclear program. His remarks followed indirect contacts between US and Iranian officials in New York.