Sharp price cuts by Saudi Arabia, the world’s largest oil exporter, and an increase in OPEC production on Monday caused oil prices to drop by more than 1%, allaying concerns about the Middle East’s growing geopolitical unrest.
By 03:44 GMT, U.S. West Texas Intermediate crude futures fell 1.15%, or 85 cents, to $72.96 a barrel, while Brent crude fell 1.09%, or 86 cents, to $77.90 a barrel.
“Saudi Aramco slashing its February OSPs bolsters the weak demand narrative,” said Vandana Hari, founder of oil market analysis provider Vanda Insights.
Saudi Arabia lowered its flagship Arab Light crude’s February official selling price (OSP) to Asia to its lowest level in 27 months on Sunday due to increased supply and competition from other producers.
“If we were just to focus 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,” IG analyst Tony Sycamore said.
“However, that doesn’t take into account the fact that geopolitical tensions in the Middle East are undeniably rising again which will mean limited downside.”
After attacks by Yemeni Houthis on ships in the Red Sea, investors returned from their holidays to focus on geopolitical risk in the Middle East, which led to a spike in both contracts of more than 2% in the first week of 2024.
This week, when visiting the Middle East, U.S. Secretary of State Antony Blinken warned that unless there is a coordinated peace effort, the Gaza crisis may expand throughout the region.
Benjamin Netanyahu, the prime minister of Israel, promised to keep fighting until Hamas was destroyed.
According to a Reuters survey, the Organization of the Petroleum Exporting Countries (OPEC) increased its output by 70,000 barrels per day (bpd) in December to 27.88 million bpd, offsetting the upward pressure on prices caused by geopolitical concerns.
“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.
Separately, according to Baker Hughes weekly report, in the U.S., oil drilling rigs climbed by one at 501 last week.
According to JPMorgan’s projection, 26 new oil rigs will be added this year, with the majority being added in the Permian during the first half.