U.S. crude oil falls 4% as Saudi price cut heightens global demand worries

An employee in a branded helmet is pictured at Saudi Aramco oil facility in Abqaiq, Saudi Arabia October 12, 2019.

Maxim Shemetov | Reuters

U.S. crude oil declined 4% on Monday after Saudi Arabia slashed its prices, raising renewed worries that the market is oversupplied at the same time as demand is weakening.

The West Texas Intermediate futures contract for February lost $3.04, or 4.12%, to settle at $70.77 a barrel. The Brent futures contract for March shed $2.64, or 3.35%, to settle at $76.12 a barrel.

The sell-off comes after Saudi Aramco on Sunday sharply lowered the price of Arab Light Crude to Asian customers by $2 per barrel.

The Saudi price cut comes amid persistent market weakness due in large part to record U.S. crude production and softening demand in China. OPEC and its allies are cutting their production by 2.2 million barrels per day this quarter in an effort to balance the market.

“While it is possible that the price reduction was to maintain market share in the face of production cuts, the market is taking it as a clear sign that the economy is slowing. Maybe the landing might not be so soft,” Phil Flynn of The Price Futures Group wrote on Monday.

U.S. crude and Brent, the global benchmark, both ended the first week of 2024 more than 2% higher on mounting tensions in the Middle East, but supply and demand concerns have persistently overshadowed geopolitical risks in the market.

“The market seems to feel that geopolitical risk will not impact supply and if it does, demand is weak so it will not matter,” Flynn wrote.

Repeated attacks by Houthi militants, who are allied with Iran, on commercial vessels in the Red Sea have forced shipping giant Maersk to avoid the crucial waterway for the foreseeable future. The situation is also deteriorating in Lebanon, where a Hezbollah commander was killed Monday in an apparent Israeli airstrike.

Analysts say a regional war that draws in Iran could lead to a disruption in the Strait of Hormuz which would have a material impact on the market. So far, however, rising tensions in the region have not led to a problem in crude supplies.

U.S. Secretary of State Antony Blinken is on a diplomatic tour of the region in an effort to reduce tensions.

Though geopolitical risk is rising, the global oil market remains well supplied. The U.S. pumped an estimated 13.2 million barrels per day of crude in the last week of 2023, and its inventories of gasoline and distillate both soared by more than 10 million barrels.

U.S. crude exports also rose by more than 1 million barrels per day to 5.2 million barrels per day in the same period. Saudi Arabia is slashing prices to stop customers from buying U.S. crude as well as to undercut cheap Iranian and Russian barrels, said Bob Yawger, energy futures strategist at Mizuho.

“Obviously they’re hitting the panic button a little,” Yawger said of Riyadh. The question is what happens if the Saudi strategy does not work, he said.

“You’re getting closer and closer to a 2020 situation here where they try to claw back market share by cutting everything to bare bones minimum and sparking a price war,” Yawger said.

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