Easing U.S./Iran Tensions Cause Another Crude Price Drop, But Saudis Committed to Market Balance

The kingdom considers the U.S. a major influence in market stability: File Image/PixaBay

Monday's crude trading was a virtual repeat of the previous session: with tensions between the U.S. and Iran cooling, traders were compelled to focus on last week's news of higher than expected U.S. oil inventories - and as a result caused crude prices to fall by about 1 percent.

Brent settled down 78 cents at $64.20 per barrel, while West Texas Intermediate settled at $58.08 a barrel, down 96 cents.

One area of concern with regards to inventory is that U.S. refinery margins for petroleum products are thin, particularly as winter demand for heating oil has been middling and gasoline margins have deteriorated.

Indeed, on Monday the U.S. heating oil crack spread HOc1-CLc1 (a measure of the profit margin for refining crude into other products), fell to $21.56, the weakest in almost five months.

Tom Kloza, global head of energy analysis at the Oil Price Information Service, noted that "It's hard for crude oil to go higher if refiners continue to lose money or at best break even on gasoline."

At first glance, it would seem the signing of the U.S./China trade deal, scheduled for Wednesday, would be a catalyst for short-term price increases, but Harry Tchilinguirian, global oil strategist at BNP Paribas, warned that "We suspect that agreement is already largely discounted in the price level, and is unlikely to provide a strong boost to oil prices."

Meanwhile, Saudi Arabia on Monday expressed clear intent to keep oil prices sustainable regardless of geopolitical tensions and other factors.

Prince Abdulaziz bin Salman, energy minister for the kingdom, told delegates at an energy conference that, "As tension remains high in our region, Saudi Arabia will continue to do all it can do to ensure stable oil markets.

"We would like to have a stable oil market, sustainable growth in terms of demand, sustainable growth in terms of supply," and he added that high and low prices were undesirable: "The worst thing is to have low oil prices that permanently damage the industry."

Remarkably, Prince Abdulaziz also cited the U.S. as a strategic partner that would play a significant role in international security: "We're leaving it to our friends in the U.S. to conduct themselves in the manner they see fit."

For his part, John Kemp, commodities analyst at Reuters, on Monday noted that hedge funds gambled heavily on an oil price recovery in 2020 largely on the strength of continued tension between the U.S. and Iran - and now that tensions seem to be diminishing, prices are vulnerable "to a sharp correction."

He remarked, "From a positioning perspective, the balance of price risks has shifted to the downside, with funds already holding a lot of bullish positions and vulnerable to disappointing economic news or any easing of tensions around the Gulf."