Oil prices fell more than 4% on February 2, with Brent crude falling to $65.98 and WTI crude to $61.84, as US-Iranian tensions and a stronger dollar erased much of January’s geopolitical risk premium.
Geopolitical thaw causes oil to plummet
Oil prices fell more than 4% on Monday, February 2, after tensions between the US and Iran apparently thawed after President Donald Trump claimed that the Iranian government was in “serious talks” with Washington. The nomination of Kevin Warsh as the next chairman of the US Federal Reserve, which accelerated the dollar’s strength, also added to the pressure on oil.
By 6:13 a.m. ET, Brent crude oil futures were down $3.34, or 4.8 percent, at $65.98 a barrel, and U.S. West Texas Intermediate (WTI) was down $3.37, or 5.2 percent, at $61.84, Reuters reported. The decline comes on the heels of Brent and WTI posting their biggest monthly gains since 2022 of 16% and 13%, respectively, in January on concerns about a military conflict with Iran.
UBS analyst Giovanni Staunovo said easing tensions in the Middle East and fewer supply disruptions in the United States and Kazakhstan weighed on prices. The US president’s remarks on Saturday followed comments from Tehran’s top security official, Ali Larijani, who confirmed that negotiations were being arranged.
Continued threats of U.S. intervention supported oil prices throughout January, but analysts said tentative openness to negotiations had erased much of the geopolitical risk premium. “This morning’s drop in oil is a combination of the dissipation of geopolitical risks and the strength of the dollar,” PVM analyst Tamas Varga said.
The decline spread across commodities, with gold and silver suffering sharp declines due in part to the strength of the dollar. Priyanka Sachdeva of Philip Nova said: “The renewed strength of the US dollar has increased the price of dollar-denominated oil for non-US buyers, further weighing on prices.”
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Analysts also warned of renewed concerns about oversupply. Over the weekend, OPEC+ confirmed it would leave output unchanged for March due to a seasonal drop in demand and freeze plans to increase production until the first quarter of 2026. Global macroeconomic firm Capital Economics said that while geopolitical risks are supporting prices, underlying markets remain bearish. “The historic example of last year’s 12-day war between Israel and Iran and a well-supplied oil market will still keep Brent crude oil prices depressed by the end of 2026,” the company said.
As oil prices continue to rise toward $70 per barrel, the trade deficits of major net importers, particularly India, Japan, and the European Union, are expected to worsen. Beyond immediate trade balance pressures, rising energy costs often cause local currencies to depreciate against the US dollar, effectively ‘importing’ further inflation.
This surge in inflation poses a dual threat. Central banks may be forced to take a hawkish monetary stance, possibly raising interest rates, curbing consumer spending and reducing overall GDP growth.
Frequently asked questions đź’ˇ
- Why did oil prices fall by more than 4%? Detente between the US and Iran and a strong dollar weighed on oil prices.
- How much have Brent and WTI fallen? Brent fell to $65.98 per barrel and WTI to $61.84.
- What role did OPEC+ play? OPEC+ left production unchanged, raising concerns about oversupply.
- What impact could $70 oil have on the economy? Exacerbating trade deficits, causing currency depreciation and increasing inflation
