Oil prices fall as Saudi defense minister travels to Iran for talks to de-escalate conflict

Crude oil prices fell Monday as Saudi Arabia's defense minister travelled to Tehran to meet with senior Iranian officials.

U.S. West Texas Intermediate futures slid 1.9% to $101.28 a barrel, while Brent crude futures declined 1.2% to $115.31 a barrel.

The pullback followed a sharp rally on Friday after attacks by Yemen's Houthi militants on Saudi Arabia reignited fears of disruptions to global energy supplies.

Saudi Defense Minister Prince Khalid bin Salman Al Saud is meeting with senior Iranian officials in Tehran to de-escalate tensions, the Saudi Foreign Ministry said in a social media post on Monday.

Tensions remained elevated over the weekend as the Houthis said they had targeted Saudi Arabia's main airport in Riyadh and oil facilities on Saturday. Saudi authorities said Sunday that they had intercepted additional missiles and drones.

The kingdom partially resumed operations at its main airport on Sunday despite damage from earlier attacks, even as the Houthis threatened further strikes.

The continued hostilities have heightened concerns about the vulnerability of Saudi Arabia's energy infrastructure, with traders increasingly focused on the risk of a major disruption to production, refining or export facilities.

Speaking to CNBC, Michael Alfaro, chief investment officer at Gallo Partners, estimated that geopolitical uncertainty had already added roughly $20 a barrel to oil prices.

"I think the theme we're in right now is that uncertainty is off the charts, and if you think about the risk premium that's baked into oil right now, it's about $20 a barrel."

Michael Alfaro

Chief Investment Officer, Gallo Partners

A substantial strike on Saudi Arabia's East-West pipeline or additional refining infrastructure could send prices sharply higher, he added, but further gains could eventually undermine consumption.

"What we would likely see if oil pushed above 120, 130, 140 dollars a barrel for Brent, that is, you're going to see more demand destruction," Alfaro said.

Beyond the immediate threat to crude supplies, damage to refining infrastructure could pose a more persistent challenge to global energy markets.

"The real challenge is refining capacity," he said, warning that the disruptions could develop into a longer-term structural problem extending into 2027 and beyond.

Meanwhile, Saudi Arabia plans to begin storing crude oil in Singapore from the second half of 2027, according to energy ministers from both countries, in a move aimed at strengthening the resilience of its Asian supply chain.

In the U.S., the Energy Department on Friday authorized the release of up to 400,000 barrels from the Strategic Petroleum Reserve to address a supply disruption at a Louisiana refinery.

Still, the prospect of additional supply from American producers remains uncertain, with companies reluctant to commit to major new investments amid volatile prices and geopolitical risks.

Alfaro added that U.S. producers were adding some drilling rigs, but remained cautious about substantially increasing capital expenditure.

"We're not really seeing major capex additions to bring new rigs on or bring new production online," he said.