Brent Crude Oil fell from a high of $128.40, the highest reported price since July 2008, to $124.9 a barrel after Saudi Authorities denied reports a key oil pipeline had been sabotaged.
Earlier, Iranian media had announced that an oil pipeline was destroyed due to an explosion in eastern Saudi Arabia. The report came at a time when there has been a steady increase in friction between Iran on one side and the United States and its allies on the other.
Analysts noted that the report exposed the vulnerability in the oil market and how nervous investors in the market react when it comes to supply issues. Some critics also suggested that the US sanctions on Iranian oil exports and the EU’s banning of oil imports from Iran is worsening the situation and will have a long term impact on the global economy.
Iran has already warned it will close the Strait of Hormuz, a vital route that Gulf states including Saudi Arabia use to supply oil to the world, if the West imposes more economic sanctions on them.
Saudi Arabia and Iran are OPEC’s largest and second largest oil suppliers respectively. Most of the developing Asian economies import large amounts of oil from Iran. The Obama administration is forcing these nations to cut off their supplies from Tehran.
Bloomberg reported that Sri Lanka, a country that depends on Iran for more that 90% of its oil requirements, has also confirmed that it will turn to other suppliers as tensions escalate.
US Treasury Secretary Timothy Geithner visited China and Japan to gather support for sanctions earlier this year.
There are increasing concerns that if countries stop buying oil from Iran they will have to turn to other suppliers to meet their demand, which could result in an undesirable price hike.
US has been trying to assure the rest of the world that global oil producers are well placed to step in and plug the short fall of Iranian oil. Suppliers like Saudi Arabia and the United Arab Emirates have shown their willingness to step in to cater to the increase in demand.
Some analysts hinted that once the global weather changes from winter to spring the demand for oil might fall further.
“Oil prices have overshot in the short-term, and with warmer temperatures as we move from winter to spring, oil demand could start to fall, starting in March,” said Gordon Kwan, head of energy research at Mirae Asset Management in Hong Kong.
“Brent could fall back below $120 (per barrel) if Iran doesn’t flare up.”
(Written by Pulakshi Arunachalam with input from BBC News; Edited by Moign Khawaja)