Crude futures closed slightly lower Monday after a morning rally driven by increased tension between Saudi Arabia and Iran fizzled, while global economic concerns were revived.

NYMEX February crude settled down 28 cents at $36.76/b, compared with an intraday high of $38.39/b. ICE February Brent settled 6 cents lower at $37.22/b after reaching $38.99/b at one point.

The front-month ICE Brent/WTI spread traded as wide as 74 cents/b Monday. ICE Brent has regained its premium over WTI after having spent late December mostly at a discount.

Refined product strength limited crude's downside. NYMEX February ULSD settled 25 points higher at $1.1264/gal. NYMEX February RBOB settled up 1.97 cents at $1.2907/gal.

"I think we're going to see strong [US] gasoline demand numbers to end the year," Again Capital partner John Kilduff said.

"The cold weather should restore some distillate demand that has been lost," he added.

Signs of worsening relations between Saudi Arabia and Iran lifted oil prices in early action Monday.

Saudi Arabia broke off diplomatic ties with Iran on Sunday after protesters in Tehran stormed the Saudi embassy following the execution of Saudi Shiite cleric Sheikh Nimr al-Nimr.

But that momentum faded as traders reassessed the situation. "It's not surprising that at sub-$40 a barrel levels you see a willingness of new buyers to come into the market," Tradition Energy senior analyst Gene McGillian said.

"Geopolitical risk was priced into the market because of the potential for supply disruptions over the weekend, but I'm a little skeptical anything will happen, and you'll see excess supplies reassert themselves," he said.

The damage between Riyadh and Tehran could even prove bearish if the likelihood of the OPEC members striking a production cut agreement has been further diminished, analysts said.

Another factor weighing on the oil complex Monday was a plunge in global equity markets on the heels of a weak Chinese manufacturing report.

The Caixin purchasing managers index in China fell to 48.2 in December from 48.6 in November.

The Dow Jones Industrial Average was down 417 points (2.4%) at 17,008 points Monday afternoon. The Shanghai Composite Index ended 243 points lower (6.9%) at 3,296 points.

"The first trading day of the year is starting off with a thud," Confluence Investment Management said in a note.

--Geoffrey Craig, geoffrey.craig@platts.com
--Edited by Keiron Greenhalgh, keiron.greenhalgh@platts.com

 

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