Oil prices continue to fall for the third consecutive day, as and West Texas Intermediate crude futures drop by more than 2 percent.
The continued decline in oil prices comes amid an atmosphere of temporary restraint in the Middle East, following a wave of escalation that lasted nearly two weeks. We are currently witnessing an informal, unilateral truce between the United States and Iran.
As we discussed on Friday, rising oil and gasoline prices and could encourage President Donald Trump to move toward de-escalation, temporarily bringing energy prices down and buying more time. We do not know the actual motive, but within hours, Trump had indeed decided to de-escalate, and consequently prices are falling, at least in the futures market. Warnings and recommendations issued by top US military leaders, such as Chairman of the Joint Chiefs of Staff Dan Caine or Central Command Commander Brad Cooper, regarding ammunition depletion and the effectiveness of the military campaign against Iran, could also drive Trump to de-escalate.
In any case, escalation factors remain present. Neither party has announced a formal return to negotiations, and there is no indication that either side will make concessions regarding the management of the Strait of Hormuz, let alone other outstanding issues, whether frozen Iranian assets or even the Iranian nuclear program. Without reaching a solid agreement on these issues, escalation could return sooner or later.
As we can see now, escalation is no longer limited to the Strait of Hormuz, as the war’s extended timeframe has expanded targets to include oil extraction and export facilities in the region, and it could cut off routes that served as a somewhat alternative to the Strait of Hormuz. This is what we are actually seeing now, as Saudi Arabia’s Abqaiq oil processing facility, responsible for processing 7 million barrels of oil per day, was hit by an attack yesterday that caused minor damage, according to an official quoted by Reuters.
Meanwhile, the Houthis in Yemen claimed responsibility for an attack hitting the East West pipeline that delivers to the port of Yanbu on the Red Sea for export.
These attacks come at a time when escalation appears moderate, limited, gradual, and capable of subsiding from time to time. However, prolonging this war will deepen damage to vital oil facilities, whether in the Gulf states or in Iran, which cannot be reversed through negotiations and could require months or even years to repair, keeping crude prices relatively elevated for an extended period.
Extreme and unlikely scenarios could become reality as the war’s timeframe extends. Furthermore, I do not believe at present in the effectiveness of military campaigns regarding their ability to open the Strait of Hormuz, and attempts by the United States to engage more broadly militarily, which could reach ground action on Iranian islands, could carry risks of broader activation of Houthi movements due to interconnected fronts, similar to what happened in Lebanon.
The solution lies in returning to serious negotiations and making concessions by both sides, paving the way for the resumption of crude flows through vital straits and for settling key issues, which could lead to establishing a firm peace in the region. Without this, the rounds of calm we see today will be temporary, followed by greater escalation being prepared by both sides of the war.
Written by Samer Hasn, Senior Market Analyst at XS.com.
