Oil prices rose slightly to $100 per barrel on Wednesday afternoon, after trading lower in the morning, as Iran and the US hold negotiations in New York to end the conflict and focus remains on Saudi supply.
Brent, the benchmark for two thirds of the world's oil, was up 1.11 per cent to $100.3 a barrel at 3.48pm UAE time, while West Texas Intermediate, the gauge that tracks US crude, was trading 0.33 per cent higher at $90.82 a barrel.
“A credible agreement to reopen Hormuz, combined with a continued recovery in Saudi exports, could push Brent towards the low $90s, as markets price a more normal supply environment,” Daniela Hathorn, a senior market analyst at Capital.com, told The National.
“But I would expect the downside to become progressively harder from there unless physical flows improve substantially [from the Strait of Hormuz and the East-West pipeline].”
The pipeline that connects the east coast of Saudi Arabia with the West coast on the Red Sea has a capacity to carry 7 million barrels of oil per day. Crude flows though the pipeline accounted for about 4 per cent of global supply during the Iran war.
The key pipeline was shut earlier this month after damage from drone attacks but resumed operations on Tuesday, at a lower rate of pumping, Reuters reported citing sources.
“The restart of Saudi Arabia’s East-West pipeline and signs of better flows through Hormuz both reduce the immediate risk of a severe supply squeeze and renewed diplomacy adds further downside pressure,” said Salih Yilmaz, senior industry analyst of energy at Bloomberg Intelligence. “If those trends continue, Brent could remain below $100 and move lower from here.”
Meanwhile, all eyes are on the US and Iran talks in New York, as the two sides seek to end the conflict and reopen the Strait of Hormuz. US President Donald Trump described the discussions as productive.
“I think there's a lot of momentum for them to make a deal,” he said at the start of a meeting with Gulf states and other regional countries on Tuesday. “That's what we are hearing from everybody.”
However, if they fail to reach a deal, oil prices could quickly surge again.
“If negotiations break down or another round of attacks damage Saudi infrastructure, tankers or Gulf export capacity, the geopolitical premium could return very quickly,” Ms Hathorn said. “Iran has already warned that renewed US military operations would trigger retaliation without limitation.”
Oil prices fell to their lowest level in a week on Monday on the prospect of a diplomatic solution to break the deadlock on the Iran war.
However, Mr Yilmaz said the upside risk has not gone away as Hormuz traffic continues to be thin and the East-West pipeline is yet to fully restart.
“If talks break down or shipping is disrupted again, prices could rebound quickly because inventories and other market buffers are much thinner than earlier in the conflict.”
There is also a risk to shipping in the Bab Al Mandeb strait if the conflict between Houthi rebels and Saudi Arabia escalates. This could push prices higher on supply disruption concerns.
The Houthi rebels have seized important places overlooking the Red Sea including the port city of Mokha and Perim Island. They announced a maritime embargo on Saudi ships last month and have been attacking vessels passing through Bab Al Mandeb, forcing the kingdom to divert crude cargo towards the Suez Canal and take a longer route around Africa to export oil to Asian markets.
