By: Economy Middle east

Global energy markets saw a significant correction on Monday, February 2, as oil prices tumbled by approximately 4 percent, snapping a weeks-long rally fueled by fears of a military confrontation in the Middle East. The sudden slide represents a sharp pivot in market sentiment, moving away from the “war footing” that characterized January 2026 and toward a tentative hope for a diplomatic resolution between Washington and Tehran.

From saber-rattling to serious talks

The primary driver behind the price collapse was a notable shift in rhetoric from the White House. Over the weekend, President Donald Trump informed reporters that Iran was “seriously talking” with his administration—a stark contrast to the aggressive threats of military intervention issued just days prior. This diplomatic signal was mirrored by Iranian officials. Ali Larijani, a top security advisor in Tehran, indicated via social media that arrangements for formal negotiations were being explored.

Adding to the cooling atmosphere, reports emerged that the naval forces of Iran’s Revolutionary Guards (IRGC) had no immediate plans for live-fire exercises in the Strait of Hormuz—a vital maritime chokepoint through which roughly 20 percent of the world’s daily oil supply flows. By Monday morning, Brent crude futures had fallen more than $2.80 to roughly $66.50 per barrel, while U.S. West Texas Intermediate (WTI) crude dropped by a similar margin to trade near $62.50.

Erasing the geopolitical risk premium

For much of January 2026, oil prices had been supported by a geopolitical risk premium. Investors were pricing in the possibility of supply disruptions stemming from nationwide protests in Iran and the subsequent threat of U.S. strikes against Iranian nuclear and oil infrastructure. Analysts at IG and ING noted that last week’s peak, which saw Brent touch six-month highs near $72, was almost entirely driven by fear. “The market is interpreting these latest comments as a significant step back from the precipice,” said Tony Sycamore, a market analyst at IG. “Traders are now aggressively unwinding the risk premium that was built into the price during the January surge.”

The easing of tensions in the Strait of Hormuz is particularly critical. In the event of a kinetic conflict, analysts from the Center on Global Energy Policy at Columbia University had warned that prices could have spiked toward $80 or $100 per barrel. With that threat receding, the market is returning its focus to the underlying fundamentals of supply and demand.

OPEC+ factor and macroeconomic headwinds

While the U.S.-Iran de-escalation was the headline mover, other factors compounded the downward pressure on crude. On Sunday, February 1, OPEC+ held its latest monitoring meeting and, as widely expected, decided to leave its production targets unchanged for March. The cartel had previously frozen planned output increases through the first quarter of 2026 due to seasonally weaker global consumption. The lack of a production cut—even in the face of falling prices—signaled to the market that supply remains ample. This “steady as she goes” approach from the Saudi-led group provided no floor for the falling prices on Monday.

Furthermore, a resurgence in the U.S. Dollar added technical pressure. Following President Trump’s nomination of Kevin Warsh as the next Chairman of the Federal Reserve, the “Greenback” surged to a multi-month high. Since oil is priced in dollars globally, a stronger dollar makes the commodity more expensive for holders of other currencies, typically depressing demand and price.

Why January was so bullish

To understand the significance of Monday’s 4 percent drop in oil prices, one must consider the factors that had previously driven prices higher. In addition to the tensions with Iran, the market had been contending with several challenges. Severe weather in North America had caused a brutal winter storm that shut down nearly 2 million barrels per day (bpd) of U.S. oil production in late January. Disruptions in Kazakhstan due to drone attacks on the Caspian Pipeline Consortium (CPC) terminal had further hampered the loading of Kazakh crude. Additionally, tighter enforcement by the U.S. on “shadow fleet” tankers transporting Russian and Iranian oil had initially restricted global availability. As these supply-side shocks began to resolve simultaneously with the diplomatic breakthrough, the “perfect storm” for high prices effectively broke.