Oil prices fell more than 2 percent on Monday as expectations that Saudi Arabia will restore part of its damaged East-West pipeline eased concerns over supply disruptions in the Middle East.
Brent crude oil, the international benchmark for Nigerian oil, dropped 2.08 percent to $101.71 per barrel in early trading, touching their lowest level since September 10, while U.S. West Texas Intermediate crude declined 2.14 percent to $98.15 per barrel.
The decline extended losses recorded at the end of last week as traders reduced some of the geopolitical risk premium built into crude prices following attacks on Saudi energy infrastructure.
Saudi Arabia is working to restore flows through its East-West pipeline after attacks disrupted the route and forced the kingdom to rely more heavily on shipments through the Strait of Hormuz.
The pipeline is strategically important because it transports crude from Saudi Arabia’s eastern producing regions to the Red Sea, providing an alternative export route that avoids the Strait of Hormuz.
Expectations that some pipeline capacity could return have eased fears that Saudi crude exports would remain severely constrained.
Saudi shipments have already shown signs of recovery. Preliminary data from analytics firm Kpler showed the kingdom’s crude exports rising above 4 million barrels per day so far in September after falling to about 2.4 million barrels per day in August.
Saudi Arabia has increased shipments through the Strait of Hormuz while its East-West infrastructure remains impaired.
The improvement in physical crude flows has reassured traders that Middle Eastern supplies are proving more resilient than initially feared despite continuing geopolitical tensions.
Oil prices are also responding to expectations of possible diplomatic progress in the conflict involving the United States and Iran as world leaders gather for the United Nations General Assembly.
The prospect of renewed negotiations has encouraged traders to remove part of the war-related premium that pushed crude prices sharply higher earlier this month.
However, supply risks remain elevated.
Yemen’s Iran-backed Houthis have continued attacks on Saudi Arabia, including strikes targeting facilities around Riyadh and the Red Sea oil hub of Yanbu.
The continued attacks mean the recovery in Saudi exports has not eliminated concerns over the security of major Middle Eastern energy infrastructure.
The Strait of Hormuz also remains particularly important to the market. Saudi Arabia’s increased reliance on the waterway exposes more of its crude exports to a route already at the centre of geopolitical tensions.
For oil-importing economies, the retreat in crude prices could provide some relief from the inflationary pressure generated by the recent surge above $100 per barrel.
For Nigeria, however, sustained weakness in crude prices could moderate the revenue gains generated by the earlier rally, although prices remain well above levels recorded before the latest escalation in the Middle East.
Traders will now monitor the pace of repairs to Saudi Arabia’s East-West pipeline, developments surrounding possible U.S.-Iran diplomatic engagement and the security of shipping routes across the Gulf.
A faster restoration of Saudi export infrastructure could further reduce the geopolitical premium in crude prices, while renewed attacks on production, pipelines or shipping routes could quickly reverse the decline.
