Oil prices fell sharply on Tuesday as fears of an Israeli strike on Iran’s oil infrastructure eased, coupled with reports suggesting Saudi Arabia may increase its oil production. Brent crude, the global oil benchmark, dropped by 4.6%, closing at $73.91 per barrel.
This marks a significant reversal, with oil prices now erasing the gains made after Iran’s ballistic missile attack on Israel earlier in the month. The spike in oil prices had initially followed President Joe Biden’s suggestion that the U.S. and Israel were considering bombing Iran’s oil facilities. Biden later walked back these remarks, indicating that alternatives to striking Iranian oil fields were being considered.
Iran had responded by threatening Gulf states, warning of retaliation on their oil facilities if attacked and reiterating its ability to close the Strait of Hormuz, a critical chokepoint through which 20% of the world’s crude oil flows daily. The escalating tensions had briefly pushed Brent prices above $80 per barrel.
However, behind-the-scenes diplomatic efforts involving Gulf states, particularly Saudi Arabia, and the U.S. appear to have calmed the situation. Saudi Crown Prince Mohammed bin Salman recently met with Iranian Foreign Minister Abbas Araghchi, and reports suggest Israeli Prime Minister Benjamin Netanyahu informed the Biden administration that Israel would refrain from striking Iran’s oil and nuclear facilities.
In addition to easing geopolitical tensions, weak demand for oil from China has further driven down prices. The International Energy Agency (IEA) reduced its global oil demand forecast for next year, citing China’s faltering economy as a key factor. China, which had been responsible for 70% of global oil demand growth in 2024, is now expected to contribute only 20% in 2025.
Oil prices have also been impacted by structural issues within the OPEC+ alliance, which includes Russia and Saudi Arabia. Saudi Arabia has signaled that it may abandon its efforts to prop up prices, potentially boosting production. The Kingdom has been doing much of the work to support prices by reducing output, while other countries like Russia and the UAE have ramped up production. This growing imbalance has raised concerns about the cohesion of OPEC+, and some analysts believe that Saudi Arabia could soon “open the floodgates” and significantly increase production.
The drop in oil prices is politically advantageous for U.S. Vice President Kamala Harris ahead of the 2024 election, as lower prices benefit American motorists. However, the price slump could have serious repercussions for Gulf economies, particularly Saudi Arabia, which relies heavily on oil revenues to fund its ambitious Vision 2030 reform plan. This program aims to diversify the Kingdom’s economy and attract foreign investment, but the International Monetary Fund (IMF) estimates that Saudi Arabia needs oil prices to be around $96 per barrel to balance its 2024 budget.
Saudi officials have already scaled back some of the Kingdom’s largest projects, including Neom, the $1.5 trillion megacity, which is now expected to host far fewer residents than initially planned and may see only 2.4 km completed by 2030.