Oil prices experienced a sharp decline of more than 2% on Monday, driven by top exporter Saudi Arabia’s substantial price cuts and an increase in OPEC output. These factors managed to offset concerns about supply disruptions stemming from escalating geopolitical tensions in the Middle East.
Brent crude, a key benchmark, slid by 2.5%, or $1.99, to $76.77 per barrel by 1237 GMT. Simultaneously, U.S. West Texas Intermediate crude futures recorded a 2.7% drop, or $2.01, settling at $71.8. This reversal follows a positive trajectory in the first week of 2024 when both contracts experienced more than a 2% increase due to heightened geopolitical risks in the Middle East, primarily driven by attacks from Yemeni Houthis on ships in the Red Sea.
On Sunday, Saudi Arabia’s price cuts for its flagship Arab Light crude took effect, establishing the February official selling price (OSP) to Asia at its lowest level in 27 months. Analysts, such as John Evans from oil broker PVM, suggest that the kingdom’s move raises questions about its intent to not only counter non-OPEC supply interference but also manage its own cartel membership.
A Reuters survey conducted on Friday revealed an increase in OPEC oil output in December, driven by rising production in Iraq, Angola, and Nigeria. This increase counteracted the ongoing Saudi Arabia’s price cuts and the reductions made by other members of the broader OPEC+ alliance. These developments occurred ahead of anticipated additional OPEC+ cuts in 2024 and Angola’s impending exit from OPEC, both of which are expected to contribute to lower January output and market share.
Tony Sycamore, an analyst at IG, highlighted the bearish sentiment in the market, considering factors such as higher inventories, increased OPEC/non-OPEC production, and a lower-than-expected Saudi OSP. However, Sycamore emphasized the impact of rising geopolitical tensions in the Middle East, suggesting that it could limit the downside potential for crude oil prices.
U.S. Secretary of State Antony Blinken engaged in further talks with Arab leaders on Monday, aiming to diplomatically address the escalating conflict in Gaza and prevent its spread. The conflict has already led to violence in various regions, including the Israeli-occupied West Bank, Lebanon, Syria, and Iraq. Additionally, Houthi attacks on Red Sea shipping lanes have further contributed to the geopolitical uncertainties in the region.
Vandana Hari, founder of oil market analysis provider Vanda Insights, commented on the significance of Red Sea tensions, stating that they serve as a relatively weak but intermittent counterweight to bearish expectations related to softening global demand and rising inventories.
Despite the overall downturn, the decline in oil prices was mitigated by Libya’s National Oil Corporation declaring force majeure on Sunday at its Sharara oilfield. This field has the capacity to produce up to 300,000 barrels per day, adding a layer of complexity to the evolving dynamics in the global oil market.
In conclusion, the current fluctuations in oil prices underscore the profound impact of geopolitical tensions, OPEC decisions, and notably, Saudi Arabia’s price cuts, collectively shaping the intricate landscape of the global oil market.
