The oil price rally has finally run out of steam, with oil prices declining for the first time in three days, with the selection of Kevin Warsh as the next U.S Federal Reserve chair (expected to be more dovish than Jerome Powell), the notable ratcheting down of rhetoric between the U.S. and Iran, a business-as-usual OPEC+ meeting and reduction in the U.S. tariff rates on India all acting against oil prices.
However, the biggest catalyst was Iran’s revelation that it will hold talks with the United States, easing fears of imminent strikes on the OPEC member. Iranian Foreign Minister Abbas Araghchi confirmed that the negotiations will be held in Oman on Friday. Brent crude for March delivery fell 2.9% to trade at $67.54 per barrel at 11.50 am ET, while the corresponding WTI contract declined 3.0% to change hands at $63.19 per barrel. Last week, oil prices spiked after U.S. President Donald Trump threatened the use of force against Iran in response to Tehran’s bloody crackdown on nationwide protests that have left thousands dead. However, a U.S. official has told AP that the White House remains “very skeptical” that the negotiations will bear fruit, with Trump warning that Iran’s Supreme Leader Ayatollah Ali Khamenei ‘’should be very worried” ahead of the talks.
Further, commodity analysts at Standard Chartered have reported that sentiment in oil markets appears to be gradually turning more positive, as the bearish oversupply narrative that was prevalent in the second half of 2025 weakening, and traders turn their attention to a more positive H2-2026. U.S. oil inventories recently posted a big drop, a positive sign for the oil bulls.
Standard Chartered argues that the shift in sentiment is being driven less by spot price moves and more by changes beneath the surface of the market. In its latest Commodity Roadmap, the bank notes that the Brent forward curve has strengthened materially over the past month, with backwardation now extending well beyond the front contracts and pushing out toward early 2027.
One month ago, backwardation was limited to the prompt structure, but its extension along the curve is being read as a signal that the market is reassessing the depth and duration of the oversupply feared in the second half of 2025. Standard Chartered analysts also noted that many of the large projected supply surpluses published last year are likely to be revised back toward more typical seasonal balances, while demand expectations for 2026 are already being adjusted higher, particularly as fiscal stimulus and policy support in China begin to filter through consumption data.
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The bank also points to positioning and supply responsiveness as key elements behind its more constructive view. According to Standard Chartered, speculative length in crude remains far from stretched, with money-manager positioning still well below five-year highs, suggesting the market is not yet crowded on the long side. At the same time, lower prices are beginning to curb U.S. shale growth, reinforcing the idea that supply is becoming more price-sensitive.
Against this backdrop, the analysts expect OPEC+ to restart incremental production increases in the second quarter of 2026, not because the market is loose, but because tighter balances and improved curve structure will allow additional barrels to be absorbed. That process, they argue, should increasingly expose how concentrated global spare capacity has become, adding an underlying layer of support even if headline prices remain anchored in the low-to-mid $60s per barrel range.
The American Petroleum Institute (API) reported a decline of 11.1 million barrels bringing stockpiles to 420.3 million barrels for the week ending February 4, significantly higher than market expectations of a draw of just 640k barrels. The sharp decline is largely attributed to severe winter storm “Fern,” which hampered energy infrastructure, reduced refinery runs, and caused production freeze-offs, particularly in the Permian Basin. Distillate fuel oil stocks also dropped significantly by 4.8 million barrels while gasoline inventories increased by 4.7m barrels.
The eight key member countries of the OPEC+ alliance, namely Saudi Arabia, Russia, Iraq, UAE, Kuwait, Kazakhstan, Algeria, and Oman, met virtually on February 1, and agreed to maintain their current voluntary oil production cuts through March 2026. The decision confirmed that the planned, gradual return of 1.65 million barrels per day (bpd) of oil to the market–originally scheduled to start earlier–will remain paused for the first quarter of 2026 due to expectations of weaker seasonal demand. Despite holding production steady, the group emphasized they maintain “full flexibility” to adjust output levels–either by continuing the pause or reversing it–based on future market developments.
The eight members also reaffirmed their commitment to full compliance with the Declaration of Cooperation and pledged to compensate for any overproduced volumes that have occurred since January 2024. OPEC+ compensates for overproduced volumes by requiring member nations to implement corresponding, “make-up” production cuts below their assigned quotas in subsequent months, a process monitored by the Joint Ministerial Monitoring Committee (JMMC).
Key overproducers like Iraq, Russia, and Kazakhstan, along with the UAE and Oman, have submitted updated, detailed schedules to offset overproduction from 2024 through mid-2026. Overproduced volumes between January 2024 and early 2025 clocked in at a cumulative 4.779 million barrels per day (b/d), which will be offset in the current year. Kazakhstan is responsible for the largest share, and is expected to cut output by nearly 670,000 bpd by June. However, there is no guarantee of full implementation, as Kazakhstan and Iraq have historically struggled to meet compensation targets.
On the natural gas front, U.S. gas prices have pulled back sharply, driven by forecasts of milder weather reducing heating demand and relieving pressure on supply. After hitting highs above $7/MMBtu, Henry Hub prices have been cut in half to trade at $3.48/MMBtu due to improved weather outlooks and easing supply fears. The EIA has forecast Henry Hub natural gas prices to average just under $3.50/MMBtu in 2026 while European (TTF) gas prices are forecast to stabilize around €30/MWh. However, gas prices are expected to trend upwards over the long-term thanks to explosive demand growth by AI-driven data centers, despite projections of weakening gas demand in Europe due to increased electrification and renewable energy adoption.
By Alex Kimani for Oilprice.com
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