Oil Prices Plummet as Saudi Arabia Cuts Crude Prices

Price Action

  • The price of West Texas Intermediate (WTI) crude for February delivery fell by 3% to $71.57 a barrel on the New York Mercantile Exchange.
  • The global benchmark, March Brent crude, dropped by 2.7% to $76.61 a barrel on ICE Futures Europe.

Market Drivers

State-owned producer Saudi Aramco announced on Sunday that it would be reducing its official selling price for crude to all regions, including its largest market in Asia, in February. The spread for Saudi crudes, including its flagship Arab light, will be cut by up to $2 a barrel.

According to Marios Hadjikyriacos, senior investment analyst at XM, this move by Saudi Arabia could be interpreted as a sign of concern about weakening demand conditions or an attempt to prevent foreign producers (such as the U.S.A.) from gaining market share. In either case, this is seen as a bearish signal for energy prices.

Oil Prices React to Red Sea Chaos and OPEC Production

Last week, the oil market experienced a bounce as a result of escalating tensions in the Red Sea. Attacks on shipping by Iran-backed Houthi rebels created concerns about a broader conflict that could disrupt Middle Eastern oil supplies. Consequently, there was a rerouting of crude, leading to an increase in demand for U.S. oil. Analysts predict that this surge in demand may help narrow the price gap between WTI and Brent, possibly resulting in record-breaking U.S. oil exports.

Boosted Demand for U.S. Oil

OPEC Production Levels

A recent Reuters survey revealed that OPEC member countries increased their oil production in December. Despite cuts made by Saudi Arabia and other members of OPEC+, Iraq, Nigeria, and Angola ramped up their production, offsetting these reductions. It is worth noting that Angola also declared its intention to withdraw from OPEC.

Production Disruptions in Libya

The protests in Libya last week compelled the closure of the Sharara oil field, prompting Libya’s National Oil Corporation to declare force majeure at the facility. As a result, Libyan oil output declined from approximately 1.2 million barrels per day to 981,000 barrels per day by Friday.

Given the production disruptions in Libya and ongoing geopolitical tensions, analysts anticipate that crude prices will remain well-supported and downside risks will be limited.

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