Oil prices took a significant hit on Monday. U. S. crude saw a drop of more than 2% as investors tried to balance the looming threat of more attacks on Saudi Arabian energy facilities with fears that high prices could hurt demand. U. S. West Texas Intermediate futures were down 2.19%, settling at $101 a barrel. Meanwhile, Brent crude futures fell 1.89% to $114.51 a barrel.
This decline comes after a notable surge on Friday. That rally was set off by attacks from Yemen's Houthi militants on Saudi Arabia, which stirred up fresh worries about potential disruptions to global energy supplies. Over the weekend, tensions stayed high. The Houthis claimed they had targeted Saudi Arabia's main airport in Riyadh and various oil facilities. Saudi authorities responded by intercepting more missiles and drones on Sunday.
Even with the damage, Saudi Arabia managed to partially resume operations at its main airport by Sunday. But the threat of more strikes hangs over the kingdom, amplifying concerns about the security of its energy infrastructure. Traders are keeping a close eye on the risk of a major disruption to production, refining, or export facilities.
Michael Alfaro, Chief Investment Officer at Gallo Partners, pointed out the influence of geopolitical uncertainty on oil prices. He estimated that this uncertainty has tacked on about $20 a barrel to current prices. Alfaro warned that a significant hit to Saudi Arabia's East-West pipeline or other refining infrastructure could cause prices to spike sharply. Such a surge might lead to demand destruction if Brent prices climb beyond $120, $130, or even $140 a barrel.
Beyond immediate threats to crude supplies, damage to refining infrastructure presents a more enduring problem for global energy markets. Alfaro cautioned that these disruptions could become a long-term structural issue, extending into 2027 and beyond.
Saudi Arabia is taking strategic steps to enhance its resilience. It plans to start storing crude oil in Singapore from the second half of 2027, strengthening its Asian supply chain. In the U. S., the Energy Department approved the release of up to 400,000 barrels from the Strategic Petroleum Reserve on Friday to counter a supply disruption at a Louisiana refinery.
Yet, the outlook for additional supply from American producers remains murky. Companies are wary of making significant new investments amid the volatile price environment and geopolitical risks. Alfaro noted that while some drilling rigs are being added, there's a hesitancy to significantly boost capital expenditure. "We're not really seeing major capex additions to bring new rigs on or bring new production online, " he said.
