Saudi Arabia's Price Cuts Trigger 1% Drop in Global Oil Prices

Global oil prices experienced a decline of more than 1% on Monday, primarily attributed to Saudi Arabia's decision to implement price cuts. This move, combined with an increase in OPEC output, overshadowed concerns about escalating geopolitical tensions in the Middle East.

As of now, Brent crude is trading at $77.73 per barrel, marking a 1.23% decrease for the day. Simultaneously, West Texas Intermediate crude (WTI) is at $72.9 per barrel, down by 1.35% compared to the previous close.

Despite starting the first week of 2024 on a positive note, with Brent Crude and WTI surging by 2.44% and 3.54% respectively, last week, the recent price cuts by Saudi Arabia have shifted market dynamics.

Vandana Hari, founder of oil market analysis provider Vanda Insights, remarked, "Saudi Aramco slashing its February OSPs bolsters the weak demand narrative," according to Reuters.

Saudi Arabia's decision to reduce the February official selling price (OSP) of its flagship Arab Light crude to Asia, reaching the lowest level in 27 months, was influenced by rising supply and competition with rival producers.

IG analyst Tony Sycamore commented, "Focusing on the fundamentals, including higher inventories, higher OPEC/non-OPEC production, and a lower-than-expected Saudi OSP, it would be impossible to be anything other than bearish crude oil. However, geopolitical tensions in the Middle East are undeniably rising again, which will mean limited downside."

While geopolitical concerns in the Middle East contributed to both contracts climbing over 2% in the first week of 2024, subsequent events, such as U.S. Secretary of State Antony Blinken's statements on the Gaza conflict and rising OPEC output, have put downward pressure on oil prices.

Vanda Insights' Hari highlighted, "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."

Additionally, in the U.S., Baker Hughes reported an increase of one oil drilling rig, bringing the total to 501 last week. JPMorgan forecasts the addition of 26 oil rigs this year, with a concentration in the Permian during the first half of the year.