Morning Highlights: Oil Plunges 5% as Trump Says Iran 'Seriously Talking'

Monday, February 2, 2026

________________________________________

MARKET SNAPSHOT

Oil collapsed as Iran-U.S. dialogue deflated the geopolitical premium that drove January's historic rally. Brent plunged $3.26 (4.67%) to $66.06/bbl, while WTI fell $3.30 (5%) to $61.91/bbl as of 6:00 EST.

Context: Brent and WTI just posted their biggest monthly increases since 2022 in January - Brent up 16%, WTI up 13% - driven by Iran military strike threats, Winter Storm Fern, and Kazakhstan outages. Today's 5% drop erases roughly one-third of January's gains in a single session.

Saturday, Trump told reporters Iran was "seriously talking," hours after Tehran's top security official Ali Larijani said arrangements for negotiations were underway.

________________________________________

TOP DEVELOPMENTS

Iran De-escalation Collapses War Premium

"The lack of further escalation of tensions in the Middle East, as well as falling supply disruptions in the U.S. and Kazakhstan, weighed on oil prices," said UBS analyst Giovanni Staunovo.

Trump had repeatedly threatened Iran with intervention if it didn't agree to a nuclear deal or continued killing protesters. Thursday, Reuters reported he was considering targeted strikes on security forces and leaders to topple the regime, driving Brent to $70.35. Friday, he said he planned to speak with Iranian leaders. Saturday, he confirmed Iran is "seriously talking."

Classic Whipsaw: This completes the pattern we've tracked all month:

• Week 1: Iran protests, Trump threatens military action → rally

• Week 2: Trump backs off, says Iran will stop killings → selloff

• Week 3: Trump deploys carrier "armada" → rally

• Week 4: Trump reveals regime change strike plans → rally to $70+

• Weekend: Iran negotiations underway → 5% collapse

"The persistent threats have underpinned oil prices throughout January," said Phillip Nova's Priyanka Sachdeva. Now those threats are evaporating.

________________________________________

SUPPLY DISRUPTIONS RESOLVED

U.S. Production: Winter Storm Fern impacts resolved (2M bpd peak outage fully restored by Friday)

Kazakhstan: Tengiz targeting full production this week (900K bpd returning)

The temporary supply constraints that justified part of January's rally no longer exist.

________________________________________

BROADER COMMODITIES SELLOFF, STRONGER DOLLAR

The slump was also driven by a broader commodities markets selloff led by deep losses in gold and silver, which analysts partially attributed to a stronger U.S. dollar.

"The recent pullback has also been reinforced by renewed strength in the U.S. dollar, which typically makes dollar-denominated oil more expensive for non-U.S. buyers, further weighing on prices," Sachdeva said.

The weak dollar at four-year lows was a significant tailwind for January's rally. Dollar strength reverses that support, creating additional headwind alongside geopolitical de-escalation.

________________________________________

OPEC+ EXTENDS MARCH PAUSE (AS EXPECTED)

At Sunday's meeting, OPEC+ agreed to keep oil output unchanged for March. In November, the grouping had frozen further planned increases for January-March 2026 due to seasonally weaker consumption.

No Surprise: This was fully expected and doesn't provide support. The key uncertainty remains April onwards, with no decisions made beyond March.

________________________________________

FUNDAMENTAL REALITY RETURNS TO FOCUS

"Concerns about global oil supply exceeding demand also came back into focus following de-escalation in the Middle East," analysts said.

Capital Economics (January 30): "Geopolitical risks mask a fundamentally bearish oil market. The historical example of last year's 12-day war (between Israel and Iran), and a well-supplied oil market, will still bear down on Brent crude prices by end-2026."

Key Forecasts We've Tracked:

• IEA: 4.25M bpd Q1 2026 surplus, 3.69M bpd full-year surplus

• Goldman Sachs: $54 Brent Q4 2026 target, 2.3M bpd annual surplus

• Morgan Stanley: 3M bpd H1 2026 surplus

• Reuters Poll: $62.02 Brent annual average, $58.72 WTI

• Analyst Range: 0.75-3.5M bpd surplus estimates

Saudi Arabia Signal: First discount pricing since December 2020 (COVID era) for March OSP

________________________________________

KUWAIT FUEL OIL EXPORTS HIT ALL-TIME HIGH

Supply Surge: Kuwait's al-Zour refinery ramped up fuel oil exports in January to all-time highs after recovering from an outage, with most cargoes bound for Southeast Asia.

Volume: Very low sulphur fuel oil (VLSFO) exports exceeded 1 million metric tons (205,000 bpd) in January, the highest monthly volume on record per Kpler and LSEG data. This follows two months of near-zero exports during Q4 outages.

The 615,000 bpd al-Zour refinery resumed operations in the second half of December and is now running at nearly full capacity.

Market Impact: "The VLSFO market is likely going to see pressure this quarter from the rise in Kuwait's exports," said Energy Aspects' Royston Huan. The hi-5 spread (price difference between VLSFO and high-sulphur fuel oil) has narrowed by more than 30% from start to end of January.

Asia's spot premiums for VLSFO have softened after a brief mid-January rebound, while the prompt February-March spread flipped into contango at end-January.

Broader Implication: Another refining capacity addition putting downward pressure on product markets, reinforcing the oversupply narrative across the barrel.

________________________________________

BOTTOM LINE

January's extraordinary 16% Brent rally is collapsing as the three pillars supporting it crumble simultaneously: (1) Iran war premium evaporates with "seriously talking" dialogue, (2) temporary supply disruptions (U.S. storm, Kazakhstan) fully resolved, and (3) weak dollar reverses to strength. Today's 5% plunge demonstrates how quickly geopolitical premiums fade when underlying fundamentals are bearish. Trump's pattern on Iran has been utterly consistent: threaten → rally → de-escalate → collapse. Markets rallied on regime change strike plans Thursday, only to see negotiations announced Saturday. The fundamental reality we've tracked all month is reasserting: IEA's 4.25M bpd Q1 surplus, Goldman's $54 Q4 target, Reuters poll $62 annual average, Saudi Arabia's first discount since COVID. OPEC+'s March pause extension was expected and provides no support, with April+ uncertain. Capital Economics nailed it: "Geopolitical risks mask a fundamentally bearish oil market." Kuwait's record VLSFO exports adding to product market pressure exemplifies the broader oversupply. Brent at $66.06 has given back roughly one-third of January's 16% gain in one session. WTI at $61.91 is approaching the Reuters poll $58.72 annual average. The trend toward Goldman's $54 Q4 target and the poll's $62 annual average is resuming after January's weather and geopolitics-driven interruption. With supply disruptions resolved, Iran dialogue underway, dollar strengthening, and the market refocusing on 4.25M bpd Q1 surplus, February looks set to reverse January's gains. This is the reality check we anticipated Friday. The selloff likely has further to run as January's late longs capitulate.