Oil prices dip over 1% due to Saudi cuts and increased Opec production

Oil prices experienced a significant drop today, with a decrease of over 1% due to the substantial price reductions introduced by Saudi Arabia, a leading exporter, coupled with an increase in the Organization of the Petroleum Exporting Countries (OPEC) production. These factors successfully counterbalanced concerns about the growing geopolitical tension in the Middle East.

During early trading, Brent crude saw a fall of 1.09%, or 86 cents, standing at US$77.90 per barrel, and US West Texas Intermediate crude futures experienced a 1.15% decline, or 85 cents, landing at US$72.96 per barrel.

Saudi Aramco’s decision to cut its February OSPs reinforces the narrative of weak demand, Vandana Hari, founder of Vanda Insights, an oil market analysis provider, commented.

Prompted by rising supply and competition with other producers, Saudi Arabia reduced the February official selling price (OSP) of its principal Arab Light crude to Asia on Sunday, marking the lowest level in 27 months, said IG analyst Tony Sycamore.

“If we solely consider the fundamentals, which include higher inventories, increased OPEC/non-OPEC production, and a lower-than-expected Saudi OSP, a bearish outlook on crude oil is inescapable.”

However, he added, this overlooks the undeniable escalation in Middle East geopolitical tensions, which will limit any potential downside. Both contracts rose by over 2% in the first week of 2024 as investors returned from holiday breaks, shifting their focus to the geopolitical risk in the Middle East after the Yemeni Houthis attacked ships in the Red Sea.

Antony Blinken, US Secretary of State, currently in the Middle East, warned that the conflict in Gaza could spread throughout the region without a concentrated peace effort. Benjamin Netanyahu, Israeli Prime Minister, typically continued with his warmongering and pledged to continue the war until Hamas was eradicated.

Despite the pressure from geopolitical concerns pushing prices upwards, a Reuters survey revealed that OPEC’s output increased by 70,000 barrels per day (bpd) in December, reaching 27.88 million bpd.

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, Hari of Vanda Insights noted.

In a separate report from the US, Baker Hughes announced that oil drilling rigs had increased by one, totalling 501 last week. JPMorgan anticipated the addition of 26 oil rigs this year, with the majority expected to be installed in the Permian during the first half of the year, reported Bangkok Post.