Oil holds biggest weekly drop since July on easing Gulf tensions

Oil was steady after the biggest weekly drop since July as an easing of geopolitical tension in the Middle East turned attention back to a flood of new supply set to hit the market this year.

The threat of an outright war has receded since Tehran fired missiles at US-Iraqi bases last week in retaliation for Washington’s assassination of its top general.

The situation in Iran remains volatile, however, amid protests against the government’s accidental downing of a commercial airliner. In Libya, warring factions have called a cease-fire in their nine-month conflict.

Oil prices are now back where they were in mid-December, with the market seemingly shrugging off the chance of more disruptions in the Gulf region. The lack of a geopolitical risk premium is partly due to plentiful supplies of US shale and a torrent of new crude from non-OPEC countries including Brazil, Guyana and Norway. On the demand side, the US and China are set to sign their limited trade deal this week, which may improve sentiment.

“Without Iran-related energy disruption, additional non-OPEC supply will comfortably exceed demand, placing downward pressure on prices,” Stephen Innes, Asia Pacific Market Strategist at AxiTrader, said in a note. Hopes of a US inventories draw may support prices this week, he said.

West Texas Intermediate crude for February delivery added 6 cents to $59.10 a barrel on the New York Mercantile Exchange as of 7.17am in London. The contract fell 6.4 per cent last week, the most since July 19.

Brent futures for March settlement was unchanged at $64.98 a barrel on the ICE Futures Europe Exchange after losing 5.3 per cent last week. The global crude benchmark traded at a $5.92 premium to WTI for the same month.

While the chances of imminent war have lessened, relations between the US and Iran remain combustible. Tehran has said it will stop abiding by limits on uranium enrichment, while the US imposed new sanctions on the Islamic Republic.

Oil markets are underestimating the risks in the Middle East and may be wrong in assuming Iran’s retaliation is over, said Jason Bordoff, head of the Center on Global Energy Policy at Columbia University in New York.

The US reported record weekly net oil exports earlier this month. Meanwhile, Brazil and Guyana are set to add more than 400,000 barrels of combined daily supplies to the market this year, a volume that would offset most of the auxiliary cuts agreed to by OPEC and its allies in late 2019, according to Stratas Advisors.