Oil prices fell sharply on Friday on easing tensions in the Middle East after a rather surprising turn of events. Saudi Arabia is implementing a partial cease-fire in Yemen, rumors surfaced that the U.S. is considering easing sanctions on Iran, and Saudi Arabia is poised to restore disrupted production from the damaged Abqaiq facility.
According to the Wall Street Journal, Riyadh has moved to impose a partial cease-fire in Yemen. The move comes a week after Houthi forces declared a unilateral cease-fire. If the partial (and perhaps temporary) laying down of arms proves durable, Saudi Arabia could broaden the cease-fire to other parts of Yemen, the WSJ reported.
The development follows the decision by Saudi Arabia and the United States not to attack Iran in response to the assault on Abqaiq. “President Trump’s decision to forgo military retaliation opens a window lasting days to weeks during which diplomacy will be prioritized,” Rapidan Energy said in a note on September 22. Because there has been on military retaliation, it has become clear in Tehran that neither Riyadh nor Washington have an appetite for war. Iran may try to capitalize on that by making moves to ratchet down tensions.
“First, Tehran has approached Riyadh with an offer to de-escalate the Yemen conflict (the Houthis are on board and have agreed to a ceasefire). If successful, Tehran’s Saudi/Yemen gambit could engender goodwill that in turn could yield a thaw with President Trump,” Rapidan Energy said. “Success in Yemen could lead to broader talks and an easing of sanctions.”
Iranian President Hassan Rouhani also claimed on Friday that the U.S. offered to remove oil sanctions if Iran returned the negotiating table, which, if true, would be a humiliating climb down for the Trump administration. The State Department’s special advisor on Iran Brian Hook quickly bat down the notion that the U.S. offered sanctions relief, and Trump himself took to twitter to dismiss the assertion. Still, Trump has sent signals that he is losing patience with his own maximum pressure campaign. He is seemingly eager to meet President Rouhani, and he even held meetings in early September to discuss the possibility of easing sanctions. He fired John Bolton, removing much of the hawkish pressure coming from his inner circle. He also was reportedly open to a French plan to participate in a credit line for Iran to help its economy, which, it should be noted, is reeling precisely because of U.S. sanctions.
“We continue to expect President Trump will eventually accede to partial sanctions relief for Iranian concessions and broader talks. But that does not appear to be imminent, as the president’s tweet this morning makes clear,” Rapidan Energy said in a separate note on Friday. The consulting firm has been predicting for several months that there is a good chance that Trump will ultimately dial back the pressure on Iran in order to reach some sort of agreement.
But the window for diplomacy won’t remain open forever. “[W]hile the Yemen ceasefire indicates a real chance of a breakthrough, zero is too low a premium for geopolitical risk,” Rapidan Energy concluded. “Iran is preparing further attacks against key Saudi oil facilities should the US not ease oil sanctions. One indicator new attacks are likely would be a collapse in the Yemen cease-fire.”
Meanwhile, Saudi Arabia appears on track to restore much if not all of its disrupted production at the Abqaiq facility in the coming days. The outage is likely to have a “negligible impact” on OECD commercial inventories, according to Goldman Sachs. The rapid turnaround has dragged down oil prices.
A slew of other bearish news undercut crude in recent days. The EIA reported an uptick in crude inventories for the second week in a row; the IEA’s executive director suggested that the agency might slash oil demand forecasts again; and weak economic data continues to point to an economic slowdown. For instance, U.S. consumer spending weakened in August, which raises concerns since the American consumer has been a source of strength in the economy even as manufacturing and industrial activity have slowed.
Finally, Bloomberg reported on Friday that the Trump administration is considering measures that would restrict capital flows from American investors into China, a move that would mark yet another dramatic escalation in the trade war. Also, Trump is mulling delisting Chinese companies from U.S. stock exchanges. No decisions on this front have been made, but traders took the rumors as a bad sign in the lead up to the restart of trade talks between the U.S. and China.
Taken together, the potential de-escalation in the Middle East and the potential for further escalation of the trade war combined to drag down oil prices, which just closed out its worst week since July.