On Monday, oil prices experienced a decline of more than 1% as top exporter Saudi Arabia implemented substantial price cuts and OPEC output increased, countering concerns about escalating geopolitical tensions in the Middle East.
Brent crude slipped 1.09%, or 86 cents, to $77.90 a barrel by 0344 GMT, while US West Texas Intermediate crude futures shed 1.15%, or 85 cents, reaching $72.96 a barrel.
The significant reduction in the February official selling prices (OSP) of its flagship Arab Light crude to Asia by Saudi Arabia contributed to the drop in oil prices. This move by Saudi Aramco, slashing its OSPs, reinforced the narrative of weak demand, according to Vandana Hari, founder of oil market analysis provider Vanda Insights.
The surge in supply and competition with rival producers prompted Saudi Arabia’s decision to cut the February OSP, reaching the lowest level in 27 months.
While fundamental factors such as higher inventories, increased OPEC/non-OPEC production, and a lower-than-expected Saudi OSP suggest a bearish outlook for crude oil, geopolitical tensions in the Middle East are undeniably rising, providing some limitation to the downside, mentioned IG analyst Tony Sycamore.
Despite the bearish fundamentals, both Brent and WTI crude contracts had initially climbed more than 2% in the first week of 2024, as investors returned from holidays and focused on geopolitical risks in the Middle East following attacks by Yemeni Houthis on ships in the Red Sea.
US Secretary of State Antony Blinken, currently in the Middle East, expressed concerns that the Gaza conflict could spread across the region without concerted peace efforts. Israeli Prime Minister Benjamin Netanyahu vowed to continue the war until Hamas was eliminated.
Offsetting the upward pressure on oil prices from geopolitical concerns, OPEC’s output rose by 70,000 barrels per day (bpd) in December to 27.88 million bpd, as indicated by a Reuters survey.
“The Red Sea tensions are the only counterweight, albeit a relatively weak and intermittent one, to crude prices succumbing to bearishness over expectations of softening global demand and rising inventories,” said Vanda Insights’ Hari.
In the United States, oil drilling rigs increased by one to 501 last week, according to Baker Hughes’ weekly report. JPMorgan forecasts the addition of 26 oil rigs this year, with most of them in the Permian during the first half of the year.
