Oil Prices Retreat as Geopolitics and Data Collide

The recent rally in oil prices has hit a wall, with crude posting its first decline in three days. A combination of factors is weighing on the market, including the potential selection of a more dovish Federal Reserve chair, cooling rhetoric between the U.S. and Iran, a routine OPEC+ meeting, and a reduction in U.S. tariffs on India.

However, the most significant catalyst was Iran's announcement that it will hold direct talks with the United States, easing market fears of an imminent military confrontation.

Geopolitical Thaw Pushes Crude Prices Lower

Iranian Foreign Minister Abbas Araghchi confirmed that negotiations with the U.S. are scheduled for Friday in Oman. The news immediately sent oil prices down, as traders priced out some of the geopolitical risk premium.

At 11:50 a.m. ET, Brent crude for March delivery fell 2.9% to $67.54 per barrel. The corresponding West Texas Intermediate (WTI) contract declined 3.0% to $63.19 per barrel.

Prices had spiked last week after U.S. President Donald Trump threatened force against Iran following a crackdown on nationwide protests that resulted in thousands of deaths. Despite the planned talks, a U.S. official told the AP that the White House remains "very skeptical" about a positive outcome. Trump also issued a warning that Iran's Supreme Leader Ayatollah Ali Khamenei "should be very worried."

OPEC+ Holds Cuts as US Inventories Plunge

On the supply side, the OPEC+ alliance met on February 1 and agreed to maintain its current voluntary production cuts through March 2026. The decision means the planned, gradual return of 1.65 million barrels per day (bpd) to the market will remain paused for the first quarter of 2026, citing expectations of weaker seasonal demand. The group reiterated that it retains "full flexibility" to adjust output based on market conditions.

Member countries also reaffirmed their commitment to compensating for any overproduction since January 2024. This is achieved through "make-up" cuts monitored by the Joint Ministerial Monitoring Committee (JMMC).

Key overproducers—including Iraq, Russia, and Kazakhstan—have submitted detailed schedules to offset a cumulative 4.779 million bpd of excess production from 2024 through early 2025. Kazakhstan is set to make the largest adjustment, cutting nearly 670,000 bpd by June. However, full implementation remains uncertain, as both Kazakhstan and Iraq have historically struggled to meet compensation targets.

Meanwhile, in the United States, the American Petroleum Institute (API) reported a massive draw in crude inventories. For the week ending February 4, stockpiles fell by 11.1 million barrels to 420.3 million barrels, dramatically exceeding market expectations of a 640,000-barrel draw. The decline was largely attributed to severe winter storm "Fern," which disrupted energy infrastructure and caused production freeze-offs, especially in the Permian Basin. Distillate fuel stocks also dropped by 4.8 million barrels, while gasoline inventories rose by 4.7 million barrels.

Analysts See Market Tightening in Late 2026

Despite the recent price drop, commodity analysts at Standard Chartered report that market sentiment is gradually turning more positive for the second half of 2026. The bank suggests that the bearish oversupply narrative that dominated late 2025 is fading.

This shift is driven by changes beneath the market's surface. The Brent forward curve has strengthened significantly, with backwardation now extending toward early 2027. This signals that traders are reassessing the depth and duration of the previously feared oversupply.

Standard Chartered also notes that:

• Many large projected supply surpluses from last year are likely to be revised toward more typical seasonal balances.

• Demand expectations for 2026 are already being adjusted higher, partly due to fiscal stimulus in China.

• Speculative long positions in crude are not overstretched, leaving room for more buying.

• U.S. shale growth is slowing in response to lower prices, making supply more price-sensitive.

Based on this, the analysts expect OPEC+ to restart incremental production increases in the second quarter of 2026. They argue this will happen not because the market is loose, but because tighter fundamentals will allow it to absorb the extra barrels, ultimately exposing how concentrated global spare capacity has become.

Natural Gas Prices Halve on Mild Weather Forecasts

In the natural gas market, U.S. prices have pulled back sharply. After recently trading above $7/MMBtu, Henry Hub prices have been cut in half to $3.48/MMBtu. This move was driven by forecasts of milder weather, which reduces heating demand and eases supply concerns.

The EIA forecasts that Henry Hub prices will average just under $3.50/MMBtu in 2026, while European TTF gas prices are expected to stabilize around €30/MWh. Over the long term, however, gas prices are projected to trend upward, fueled by explosive demand growth from AI-driven data centers, even as demand in Europe is expected to weaken due to electrification and renewable energy adoption.